Ixed Interest Securities and Derivatives.

Coursework for 2FIN656 Fixed Interest Securities and Derivatives.

Part A:

Suppose you are a financial consultant. At various times you have heard comments on interest rates from one of your clients. How would you respond to this comment?

I cant make any sense out of todays term structure. For short-term yields (up to three years) the spot rates increase with maturity; for maturities greater than three years but less than eight years, the spot rates decline with maturity; and for maturities greater than eight years the spot rates are virtually the same for each maturity. There is simply no theory that explains a term structure with this shape.i??

Please answer the above question in a maximum of 1500 words. Your answer must be referenced.

Part B:

Indicate whether you agree or disagree with the following statement:
The PSA prepayment benchmark is a model for forecasting prepayments for a pass-through security.i??

Please answer the above question in a maximum of 1000 words. Your answer must be referenced.