Valuation and characteristic of bonds and

To say we have been in a period of low interest rates is an understatement. With that said, interest rates are now rising.

Valuation and characteristic of bonds and

Among other things, securitization distributes risk and permits investors to choose different levels of investment and risk.

Mortgage loans mortgage notes are purchased from banks and other lenders, and possibly assigned to a special purpose vehicle SPV. The purchaser or assignee assembles these loans into collections, or "pools".

The purchaser or assignee securitizes the pools by issuing mortgage-backed securities. While a residential mortgage-backed security RMBS is secured by single-family or two- to four-family real estate, a commercial mortgage-backed security CMBS is secured by commercial and multi-family properties, such as apartment buildings, retail or office properties, hotels, schools, industrial properties, and other commercial sites.

These securitization trusts may be structured by government-sponsored enterprises as well as by private entities that may offer credit enhancement features to mitigate the risk of prepayment and default associated with these mortgages.

Since residential mortgage holders in the United States have the option to pay more than the required monthly payment curtailment or to pay off the loan in its entirety prepaymentthe monthly cash flow of an MBS is not known in advance, and an MBS therefore presents a risk to investors.

Some private institutions also securitize mortgages, known as "private-label" mortgage securities. Unlike the traditional localized, inefficient mortgage market where there might be a shortage or surplus of funds at any one time, MBSs were national in scope and regionally diversified.

They also "undid the connection between borrowers and lenders". Securitization[ edit ] Ginnie Mae guaranteed the first mortgage pass-through security of an approved lender in Subprime mortgage crisis Low-quality mortgage-backed securities backed by subprime mortgages in the United States caused a crisis that played a major role in the —12 global financial crisis.

To distinguish the basic MBS bond from other mortgage-backed instruments, the qualifier pass-through is used, in the same way that "vanilla" designates an option with no special features.

Subtypes of mortgage-backed security include: Pass-through securities are issued by a trust and allocate the cash flows from the underlying pool to the securities holders on a pro rata basis. A trust that issues pass-through certificates is taxed under the grantor trust rules of the Internal Revenue Code.

Under these rules, the holder of a pass-through certificate is taxed as a direct owner of the portion of the trust allocatable to the certificate. In order for the issuer to be recognized as a trust for tax purposes, there can be no significant power under the trust agreement to change the composition of the asset pool or otherwise to reinvest payments received, and the trust must have, with limited exceptions, only a single class of ownership interests.

A collateralized mortgage obligationor "pay-through bond", is a debt obligation of a legal entity that is collateralized by the assets it owns. Pay-through bonds are typically divided into classes that have different maturities and different priorities for the receipt of principal and in some cases of interest.

These two components can be separated to create SMBS's, of which there are two subtypes: An interest-only stripped mortgage-backed security IO is a bond with cash flows backed by the interest component of property owner's mortgage payments.

Valuation and characteristic of bonds and

A net interest margin security NIMS is re-securitized residual interest of a mortgage-backed security [32] A principal-only stripped mortgage-backed security PO is a bond with cash flows backed by the principal repayment component of property owner's mortgage payments.

There are a variety of underlying mortgage classifications in the pool: Prime mortgages are conforming mortgages with prime borrowers, full documentation such as verification of income and assetsstrong credit scoresetc.

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Alt-A mortgages are an ill-defined category, generally prime borrowers but non-conforming in some way, often lower documentation or in some other way: For example, an Alt-A loan might be to an individual with multiple and varying sources of income; non-owner occupied, investment properties are often Alt-A loans.

Jumbo mortgage when the size of the loan is bigger than the "conforming loan amount" as set by Fannie Mae or Freddie Mac. As such, the mortgage rates on jumbo loans are somewhat higher than for conforming loans. Bonds backed by mortgages but that are not MBSs can also have these subtypes.

There are two types of classifications based on the issuer of the security: Agency, or government, issued securities by government-sponsored enterprise issuers, such as Fannie MaeFreddie Macand Ginnie Mae.

Valuation and characteristic of bonds and

Fannie Mae and Freddie Mac sell short term 3—6 month bills at auction on a weekly schedule, [35] and longer-term 1—10 year notes at monthly auctions. Non-agency, or private-label, securities by non-governmental issuers, such as trusts and other special purpose entities like real estate mortgage investment conduits.

The underlying mortgages for Non-Agency MBS are backed by second mortgage loans, manufactured housing loans, and a variety of commercial real estate loans, in addition to single family residential mortgages.

Secondary mortgage market[ edit ] The secondary mortgage market is the market where a network of lenders sell, and investors buy, existing mortgages or MBS.36 Chapter 7 -- Stocks and Stock Valuation Characteristics of common stock The market price vs.

intrinsic value Stock market reporting. Bond valuation and bond yields.

Bond Basics: Characteristics

Valuing bonds based on the yield curve Annual spot yield curves are often published by the financial press or by central banks (for example, the Bank of England regularly publishes UK government bond yield curves on its website).

The spot yield curve can be used to estimate the price or value of a bond. One important characteristic of warrants is that they are often detachable.

That is, if an investor holds a bond with attached warrants, he or she can sell the warrants and keep the bond. This is because the higher the minimum value of the attached warrant, the higher the value of the bond or preferred shares. Bond Terminology and Practice Bond Valuation—Basic Ideas Determining the Price of a Bond Maturity Risk Revisited Finding the Yield at a Given Price Call Provisions Risky Issues Institutional Characteristics of Bonds Registration, Transfer Agents, and Owners of Record Kinds of Bonds Bond Ratings—Assessing Default Risk Bond .

You just clipped your first slide! Clipping is a handy way to collect important slides you want to go back to later. Now customize the name of a clipboard to store your clips. There are two characteristics of an option-free bond that determine its price volatility: coupon and term to maturity.

First, for a given term to maturity and initial yield, the price volatility of a bond is greater, the lower the coupon rate. This characteristic can be seen by comparing the 9%, 6%, and zero-coupon bonds with the same maturity.

Chapter 7 The Valuation and Characteristics of Bonds : Top Class Essay