3.23.2005

Q: In the Wall Street Journal, you note that the GNMA yields...

...are about 100 basis points higher than Treasuries with comparable maturities. On this basis can we conclude that GNMAs are better investments than Treasuries?

A: GNMAs have prepayment risk and the Treasuries do not. As a result, we will expect the GNMAs to trade at a spread over the Treasuries. The 200 basis points should be viewed in this context. It comes down to whether the 100 basis points spread is sufficient to compensate for the prepayment risk.

Category: C++ Quant > Debt

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