Single class and multi-class mortgage-backed/asset-backed securities are valued at amortized cost using the interest method including anticipated prepayments.

Question

Options

• ATrue
• BFalse

• A
  72% (43)
• B
  28% (17)

Explanation

A is correct because under U.S. GAAP (ASC 310-20 and related guidance), both single-class and multi-class mortgage-backed securities (MBS) and asset-backed securities (ABS) are carried at amortized cost using the interest method, which systematically allocates premium or discount over the life of the security. Critically, this method requires incorporating anticipated prepayments - not just contractual cash flows - because prepayments materially affect the timing and amount of cash received, directly impacting the effective yield calculation.

B is wrong simply because the statement is accurate; there is no exception for multi-class structures (e.g., CMOs, CLOs) - both single and multi-class securities follow the same amortized cost / interest method framework with prepayment assumptions built in.

Memory tip: Think "MBS = Must Be Systematic" - the interest method is the systematic way to amortize, and you must bake in prepayments because borrowers pay early in the real world. If the method ignored prepayments, the effective yield would be wrong, which defeats the entire purpose of the interest method.

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