1. You are an institutional money manager looking to add some Ginnie Mae MBS to your portfolio. Consider the following statement made to you by a salesperson from broker-dealer Oldman Sax, who had attached the Bloomberg screen in an email:
"At the current price of 113-10, the calculated cash flow yield of 3.4788% represents the return that an investor is guaranteed to receive upon buying this mortgage-backed security."
For each question, identify which of the following statements (A, B, C, D) is correct:
A. This statement is true because the guarantee made by the Ginnie Mae (full faith and credit of the US Treasury) against homeowner defaults is stronger than those provided by Fannie Mae and Freddie Mac.
B. This statement is true as long as the actual future prepayment experience matches the assumed prepayment speed (PSA of 285) that Oldman Sax typed into the calculator.
C. This statement is false: The actual return could be much higher i prepayments speed up (pay faster than PSA 285) in the future.
D. This statement is false: The actual return could be much higher i prepayments slow down (pay slower than PSA 285) in the future.
2. Actually, a projected cash flow yield of about 3.5% sounds pretty good to me these days.
Consider a financial advisor working at a typical retail brokerage firm who (like me) also thinks that this Ginnie Mae MBS is attractively priced.
A. She should call her accounts and recommend this security to them.
B. She should call her accounts, but recommend this security to them only after she has explained the product.
C. She should call her accounts, but recommend this security to them only after she has explained the product and investment risks completely.
D. She should not recommend this product to her accounts under any circumstances.