This thesis treats several pricing methodologies of the Asset-Backed Securities(ABS) according to the characteristics of their underlying assets. When the prepayment option is present but not likely to be exercised by borrowers, the ABS can be valued
by discounting the expected cash flows by the issuer's on-the-run spot rates. When the prepayment option is present and is likely to be exercised for refinancing purposes, a valuation model that takes into account the embedded option should be used. The valuation model that must be used when the prepayment option is likely to be exercised for refinancing purposes depends on whether the cash flows of the underlying assets are interest rate path-independent or not.
If the cash flows of the underlying assets are interest rate path-independent, the Binomial model can be used. Otherwise, the Binomial model or the Monte Carlo Simulation model can be used.
In this paper, a case study was performed to determine the theoretical value of ABS(especially, the interest rate of the Mortgages) using the Binomial model.
