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CH7 - Bus 171 A CDS(Credit Default Swap Insurance CH7...

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10/9/2008 Bus 171 A CDS (Credit Default Swap) - Insurance CH7 Mortgages - a long term loan secured by real estate o Usually no recorse (you could leave your house and the bank cannot go after your personal assets) on homes by law Differences between mortgages and securities 1. Borrowers of mortgages are usually individuals. Issuers of securities are usually government and firms. 2. Mortgage amounts (face value) vary and maturities vary Attributes (1) and (2) make development of secondary market difficult A mortgage is usually amortized by maturity Bonds pay back principle at maturity (like a mortgage balloon loom) - Duration of mortgage vs. bond of same maturity? ************** Mortgage has shorter duration because with mortgage some principle is paid back with every payment but with bond the face need to be paid back as a whole at the end of the maturity 1880 – Almost all mortgages in farms 2000 – More than 75% is on the housings 2006 – Total value of mortgages in US 9.5 trillion
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