I got this really intersting interview question: how do you price Access spread? or How much is it worth? MBS is always structured in the form of Senior-subordinate - OC , but Excess spread = Total Coupon from the loans - coupon on the bonds, its actually a fixed formula, it seems like there is nothing to price at all, so what is the point of this question? or Are they actually asking how to price the OC?Thanks , everybody.

dont what the OC is - but isnt the excess spread just the value of the refinancing option that the holder of MBS is short of ?

I don't think we are talking about the same thing. I think What they are asking is on structure level.

Excess spread provides credit enhancement to the notes and is not normally fixed over the lifetime of the structure, because of prepayment, amortisation and defaults., thus reducing the asset margin from the loans in your formula.Consider a structure with initial excess spread that issues notes paying some coupon at Libor + X bps. Now consider the same structure but without excess spread. As an investor, to receive the same coupon, you're going to pay less for this because there's less credit enhancement.Hope that adds some clarity.

But how to price the excess spread and what is the point of pricing it? Are there acutally investors who are investing Excess spread?

Does that mean OC and excess spread are the same things?

QuoteOriginally posted by: dingdingDoes that mean OC and excess spread are the same things?Although both OC and excess spread provide credit enhancement, they are not the same.OC (=overcollateralisation) is the case when the value of the assets exceeds the face value of the notes, which may have came about by buying the assets at a discount. For real-life numbers and more info, consider reading some of the credit rating agencies' methodologies or an actual public presale report.

QuoteOriginally posted by: dingdingBut how to price the excess spread and what is the point of pricing it? Are there acutally investors who are investing Excess spread?You don't 'invest' in excess spread. It's either in the structure as simplified in your formula or it may not be captured at all (returned to the originator).As i tried to clarify before, 'price' of excess spread = (price with excess spread) - (price without excess spread), where all other things being equal.

QuoteOriginally posted by: ArbitraryQuoteOriginally posted by: dingdingBut how to price the excess spread and what is the point of pricing it? Are there acutally investors who are investing Excess spread?You don't 'invest' in excess spread. It's either in the structure as simplified in your formula or it may not be captured at all (returned to the originator).As i tried to clarify before, 'price' of excess spread = (price with excess spread) - (price without excess spread), where all other things being equal.TextCan I ask?? price of what with or without excess spread?if there is nobody who is getting excess spread, then what is it there for? Thank you.

hi, Arbitrary:If like you said: the price of excess spread = price with excess spreaad- price without excess spread, then does this mean , for each tranche, it has a different price for access spread? because every single tranche has a different price.Thank you.

Quotehi, Arbitrary:If like you said: the price of excess spread = price with excess spreaad- price without excess spread, then does this mean , for each tranche, it has a different price for access spread? because every single tranche has a different price.Thank you. -------------------------Everyday Needs a PurposeCorrect me if I'm wrong, but isn't the Excess Spread kept for the manager, placed into a Spread account (for investor protection), passed on to the originators, or any combiantion of those things? Why are you now bringing tranches into the discussion?Example:WAC of the MBS @ 8%CDO sells @ 6%Esxcess Spread = 2%$100MM CDO with above characteristics generates annual in income of $2MM on Excess Spread.Anything further than that and you should be digging up some transactions comps - probably not what they are looking for...QuoteTextQuoteText