Which of the Following Are Not Considered a Simplifying Assumption

question 51

Multiple Choice

Which of the following are not considered a simplifying assumption indicative of the restrictive nature of the option model approach and the option-adjusted spread?

• A)The only reasons for prepayment are due to refinancing mortgages at lower rates; there is no prepayment for turnover reasons.
• B)The current discount (zero-coupon) yield curve for T-bonds is flat.
• C)The mortgage coupon rate is 10% on an outstanding pool of mortgages with an outstanding principal balance of $1 million.
• D)Mortgage loans are fully amortized, and there is no servicing fee.
• E)The interest rate movements over time change a maximum of 10% up or down each year and the time path of interest rate does not follow a binomial process.

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Definitions:

Low Content

Refers to materials, information, or substances that are present in minimal amounts.

Ropy Texture

A geological texture characterized by smooth, undulating surfaces, commonly found in pahoehoe lava flows.

Gas Pressure

The force exerted by gas on the walls of its container or anything it comes into contact with.

Explosive Eruptions

Volcanic eruptions characterized by violent explosions that propel ash, tephra, and volcanic gases into the atmosphere, typically associated with high-viscosity magmas.