• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Mortgage Cash Flow Characteristics

CFA® Exam, CFA® Exam Level 2, Fixed Income Securities

This lesson is part 2 of 25 in the course Fixed Income Part 2
  • Simply put, a mortgage is a debt instrument that is backed by real estate as collateral.
  • Fully Amortized Mortgage Loan: Borrower makes an equal monthly payment that includes an interest component and a principal repayment component.
    • In the early years of the repayment schedule, interest makes the largest share of the monthly payment, as principal repayment takes over as the largest share in the later years.
With a TI BA2+ calculator, the monthly payment can be obtained by entering the following:

 

  • PV = Mortgage Amount
  • I/Y = Monthly interest rate (i.e. the annual interest rate / 12)
  • N = Number of months in mortgage (i.e. 12 * number of years)
  • CPT PMT: Will generate monthly mortgage payment
  •  
  • When a private investor purchases a mortgage from a financial institution as an investment, the financial institution will take out a service fee from the mortgage’s coupon rate.
Investor’s Net Interest/Net Coupon = Gross Coupon – Service Fee
  • Commonly mortgages can be wholly or partially pre-paid at the borrower’s discretion, without penalty.
    • NOTE: when evaluating asset backed securities it is critical to know whether or not the borrower can prepay without penalty. This will impact the security valuation approach; more to come.
  • Prepayment: Payment in excess of the required monthly minimum; commonly applied as a reduction of principal.
  • Curtailment: Borrower prepays only a portion of the debt principal.
    • Example: a borrower with an amortizing mortgage loan pays above the monthly minimum, but not so much that the payment covers the full remaining balance of the debt.
  • In the event the mortgage market rates drop below the borrower’s existing rate, then the borrower has an incentive to refinance.
  • Refinancing: Taking out a new lower rate mortgage to repay the existing higher rate mortgage.
  • Prepayment Risk: Risk to the lender (investor) that the borrower will repay the mortgage principal sooner than expected and the lender will be forced to reinvest (or relend) the funds at a lower interest rate.
Previous Lesson

‹ CFA Level 2: Fixed Income Part 2 – Introduction

Next Lesson

Mortgage Pass-through Securities: Characteristics and Risks ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • CFA Level 2: Fixed Income Part 2 – Introduction
  • Mortgage Cash Flow Characteristics
  • Mortgage Pass-through Securities: Characteristics and Risks
  • Cash Flows and Prepayment Risk
  • Single Monthly Mortality (SMM) & Conditional Prepayment Rate (CPR)
  • PSA Prepayment Benchmark
  • Collateralized Mortgage Obligations (CMO) and CMO Tranches
  • Stripped MBS – Interest Only (IO) and Principal Only (PO)
  • Residential Non-Agency MBS
  • CMBS: Structure and Call Protection
  • Amortizing Loans vs. Non-Amortizing Loans
  • Overview of Asset Backed Securities (ABS)
  • Internal and External Credit Enhancements
  • Pay-through Structures: Prepayment Tranching vs. Credit Tranching
  • Home Equity Loans (HEL) Backed Securities
  • Manufactured Housing Backed Loans
  • Auto Loans Backed Securities
  • Student Loan Backed Securities (SLABS)
  • SBA Loan Backed Securities
  • Credit Card Receivable Backed Securities
  • Collateralized Debt Obligations (CDOs) and Synthetic CDOs
  • Cash Flow Yield, Nominal Spread, and Zero Volatility Spread for ABS/MBS
  • Monte Carlo Simulation for ABS/MBS
  • Duration and Convexity for ABS/MBS
  • Choosing an Appropriate Spread for ABS/MBS

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us