Mortgage Backed Securities – Definition and Other Information
Post on: 29 Август, 2015 No Comment
In finance, a mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans.
Residential mortgagors in the United States have the option to pay more than the required monthly payment (curtailment) or pay off the loan in its entirety (prepayment). Because curtailment and prepayment affect the remaining loan principal, the monthly cash flow of a MBS is not known in advance, and therefore presents an additional risk to MBS investors.
The yield on mortgage-backed securities is typically higher than that on comparable Treasury notes or bonds, in large part as a result of the premium associated with the prepayment risk imbedded in pass-through mortgage securities. Mortgage arbitrage Portfolio Managers typically take long mortgage-backed positions and attempt to hedge interest-rate, prepayment and other risks. Substantial profits may be realized if the Portfolio Manager is able to purchase undervalued securities and hedge properly against interest rate prepayment and other risks.
Other Resources:
- The Investment Funds Institute of Canada: Certificates that represent ownership in a pool of mortgages. The holders of these securities receive regular payments of principal and interest. More…
