Agency mortgage-backed securities, Financial Management

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. 

Posted Date: 9/8/2012 6:52:33 AM | Location : United States







Related Discussions:- Agency mortgage-backed securities, Assignment Help, Ask Question on Agency mortgage-backed securities, Get Answer, Expert's Help, Agency mortgage-backed securities Discussions

Write discussion on Agency mortgage-backed securities
Your posts are moderated
Related Questions
Wing Yin Tsui, CEO of Lian Huang & Wong Bin Dean Hwang Manufacturing Limited is considering a four year project. The project requires an initial investment of $10,000,000 to buy ne

Q. Application of concept of TVM Sometime the financial manager has to deal with the varying situation of the decision making where the concept of TVM needs to be applied in th

How is finance related to the disciplines of accounting and economics? Financial management is fundamentally a combination of economics and accounting. First financial managers

Q. Determine Interest coverage ratio? Current interest coverage ratio = 7000/500 = 14 times Increased profit before interest and tax = 7000 × 1.12 = $7.84m Increased inte

Define Hedger - Market Participants A hedger desires to prevent price variation by locking in a purchase price of the underlying asset by a long position in a futures contract

Question: Part A: Justify and criticize the usual assumption made in Financial Management literature that the objective of a firm is to maximize the wealth of its sharehol

Functional Classification of Mutual Funds Functional classification of Mutual Funds is based on the basic characteristics of the mutual fund schemes for subscription. Mutual Fu

Q. Incorporation of the Risk in Investment Proposal? Incorporation of the Risk in Investment Proposal: - As stated previous risk is involved in every capital budgeting decision

The theoretical spot rates for treasury securities represent the appropriate set of interest rates that should be used to value the risk from default-free cash fl

What are the misconceptions about Financial Management?