Agency mortgage-backed securities, Financial Management

Assignment Help:

Agency Mortgage-Backed Securities (AMBS) are securities that are backed by the mortgage loans. These securities include mortgage passthrough securities, stripped mortgage-backed securities and Collateralized Mortgage Obligations (CMOs).

Mortgage securities are created when a mortgage provider, such as a savings association, commercial bank or mortgage company, sells its residential loans to a federally sponsored credit agency or a private institution. The agency then assembles these mortgages and issues certificates to investors with underlying residential or mortgage loans as collateral. These certificates are called mortgage pass through securities because when the residential house property owner pays his monthly mortgage payment, such payment is 'passedthrough' to the mortgage security holder as interest and return of principal on a monthly basis. In addition to 'mortgage passthrough securities', there exists another type called 'collateralized mortgage obligations' or 'mortgage derivatives.' The latter is said to be more complicated when compared to that of the former one. 

Unlike a mortgage passthrough, in which all investors participate proportionately in the net cash flows from the mortgage collateral, in a CMO different bond classes are issued. These bonds called tranches participate in different components of the net cash flows. The tranches carry their own risk characteristics and maturity range. This helps investors to select a bond offering the characteristics, which most closely meet their needs.

The CMO structure offers issuers a flexible tool with which to design tranches to meet investor needs and respond to market conditions. There is a wide range of CMO tranches designed to reduce an investor's exposure to prepayment risk. The tranche types are defined according to general characteristics - a few of the major ones are sequential-pay tranches, planned amortization class (pac) tranches, support or companion tranches, accrual bonds (Z bonds), floating-rate tranches, etc. 


Related Discussions:- Agency mortgage-backed securities

Working capital mini qs, Q. Working capital mini Qs? During January 20X...

Q. Working capital mini Qs? During January 20X4, Gazza Ltd made credit sales of £30,000 that have a 25% mark up. It also purchased £20,000 of inventories on credit. Calculat

Financial institution versus raising in financial markets, You are the chie...

You are the chief financial office (CFO) of Gaga Enterprises, edgy fashion design firm. Your firm needs $10 million to expand production. How do you think the process of raising th

Medium-term notes (mtns) , Medium-term notes are debt instrumen...

Medium-term notes are debt instruments that can be offered continuously to an investor. An agency of the issuer offers these; and these are avai

Help ASAP, If firm A has a higher debt-to-equity ratio than firm B then tha...

If firm A has a higher debt-to-equity ratio than firm B then that means what

Periodic system, limitations of using a periodic inventory system

limitations of using a periodic inventory system

Operating cycle, Uses of operating cycle in business

Uses of operating cycle in business

Opposite project - net present value, A company has the opportunity to sell...

A company has the opportunity to sell an old machine. The machine is fully depreciated to a zero book value but could be sold for $5,000. If the company did not sell the machine, i

Degree of operating leverage, Degree of Operating Leverage A measure o...

Degree of Operating Leverage A measure of the firm's operating leverage, which is calculated as the contribution margin distributed by income before taxes. A rigid with a high

Stakeholders, identify five stakeholder groups and breifly explain their fi...

identify five stakeholder groups and breifly explain their financil and other objectives

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd