Abstract
In the fixed income securities markets, mortgage-backed securities tend to trade at higher yields than do other comparably rated securities. Instead of having to stand in line with other creditors, there are several layers of protection offered by a mortgage-backed security: 1. the creditworthiness of the borrower, 2. the security of the real estate backing the mortgage, and 3. various levels of primary insurance, mortgage pool insurance, and special hazard insurance. Mortgage bonds have a unique cash flow characteristic since payments are made monthly. Due to principal prepayments, mortgage-backed securities have an uncertain maturity. One way to take advantage of these special characteristics is to make the payment stream part of a dedicated portfolio to pay monthly obligations. Principal repayments tend to increase the yield of a security that was purchased on a discount.