This study presents a procedure for evaluating collateralized mortgage obligations(CMO) tranches of KoMoCo MBS2002-2 applying extended rational valuation model. The main procedure is to build critical interest rate boundary, to build prepayment function, to simulate cash flow of each tranche, and to evaluate each tranche.
Finite Difference Method of Crank-Nicolson scheme was used for critical interest rate boundary. Exponential survival function was applied for prepayment function. Monte Carlo simulation was conducted for building future cash flows and evaluating them.
The result shows that MBS2002-2’s tranches are undervalued except Z-bond which is repurchased by the original mortgage holder. The expected maturities of tranches that have call option feature was shorter than planned maturity by one to two years. Sensitivity test was conducted.