Lecture 6
Mortgage-Backed Securities
FINN 6211
1
Mortgage-Backed
Securities: Terms
Mortgage-Backed Securities (MBS) or Mortgage
Pass-Throughs (PT) are claims on a portfolio of
mortgages.
Creation: A federal agency, mortgage banker,
bank, or investment c

Lecture 4:
General Interest Rate
and Yield Curve
1
Lecture Outline
I. General Interest Rate
II. Factors Affecting Bond Yields
III. Yield Curve Analysis and Theories
2
I. General Interest Rate
A.
B.
C.
D.
Business Cycle and Interest Rates
Economic Variable

FINN 6211
Lecture 4 Supplemental Materials
Topics
1. Money Rates Definition
2. Fed Funds Rate
3. Use of Spot Rate Curve
4. Curve Fitting
1. Money Rates Definition
a.
Prime Rate: The base rate on corporate loans posted by at least 75% of the
nations 30 lar

FINN 6211
Lecture 5 Supplemental Materials
1. Treasury Auction Process
2. When-Issued (WI) Trading
3. TIPS
1. Treasury Auction Process
Use the 10-year Treasury note auction from Lecture 5 slides to illustrate the process. The auction
results (shown on sli

FINN 6211 Lecture 6 PSA Model
Background on PSA Model:
PSA Model is the prepayment model by the Bond Market Association (BMA) formerly known as
Public Securities Association (PSA). BMA was an international trade association for the bond
market industry. O

Lecture 6 MBS
Shift-Interest Structure Example Extended
Based on the shift-interest structure example in Lecture 6 slides, below I illustrate a few more
extensions:
Given: At origination, we have $100M pass-throughs that are divided into $92.25M senior cl

Quantitative Finance, Vol. 12, No. 1, January 2012, 3948
Mark-to-model for cash CDOs through
indifference pricing
GUILLAUME BERNIS*
Natixis Asset Management, Fixed Income, 21 quai dAusterlitz, 75634 Paris Cedex 13, France
(Received 10 June 2010; in final

American Economic Review: Papers & Proceedings 2011, 101:3, 125130
http:/www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.125
Did Credit Rating Agencies Make Unbiased Assumptions
on CDOs?
By John M. Griffin and Dragon Yongjun Tang*
Financial intermediari

Quantitative Finance, Vol. 10, No. 3, March 2010, 265277
Pricing a CDO on stochastically correlated
underlyings
MARCOS ESCOBAR*y, BARBARA GOTZz, LUIS SECOx and RUDI ZAGSTz
yDepartment of Mathematics, Ryerson University, 350 Victoria St., Toronto, M5B 2K3

Using CLOs to Manage the Credit
Risk of Corporate Loan Portfolios
Claas Becker and Gene D. Guill
Collateralized loan obligations (CLOs) are a key tool for
managing the credit risk of corporate loan portfolios. Along
with credit default swaps (CDSs), CLOs

Lecture 7
CMO and MBS Analysis
FINN 6211
1
Collateralized Mortgage
Obligations
CMOs are securities backed by a pool of
mortgages, MBS, stripped MBS or CMOs.
They are structured so that there are several
classes of bonds; these classes are called tranche

CLO Update
JUSTIN PAULEY
JUSTIN PAULEY
is a CLO strategist at
RBS in Stamford, CT.
justin.pauley@ rbs.com
T
he recent financial crisis demonstrated to investors that the collateralized loan obligation (CLO)
structure works. In fact, overcollateralization

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner

Lecture 3:
Bond Price Volatility
1
Lecture Outline
I.
II.
Bond Price Volatility
Application of Price Volatility Measures
Spread Trades
Bullet versus Barbell
2
I. Bond Price Volatility Measures
Inverse Relation between Price and Yield
A convex relation o

FINN 6211
Supplemental Materials for Lecture 3
Topics:
1. Bond Price Volatility and Three Factors
2. Measuring the Price Sensitivities of Portfolios
3. More on Convexity: Positive and Negative Convexity
4. Relation between modified duration and Macaulay D

FINN 6211
Repurchase Agreements (Repos): Additional Information
Repurchase Agreements Defined
A repurchase agreement (Repo) is a sale of securities coupled with an agreement to
repurchase the same securities on a later date. A repo is thus broadly similar

Review of Time Value (continued)
When the same amount of money is invested periodically,
it is referred to as an annuity.
Lecture 2
Bond Valuation
and Measuring Yield
When the first investment occurs one period from now, it
is referred to as an ordinary a

Business Cycle and Interest Rates
Lecture 4:
General Interest Rate
and Yield Curve
Business Cycle: Pattern of growth and
expansion followed by contraction and decline.
Growing economy => unemployment
=> demand for labor
=> inflationary growth
=> inte

Features of the Price-Yield
Relation
For a given bond, the positive change in
price (+P) is similar in absolute
magnitude to the negative change in price
(- P), for a small change in yield.
For a given bond, the positive change in
price (+P) is larger i

Basic Features of Pass-Through:
Rate and Maturity
WAC (weighted-average coupon rate)
Lecture 6
Mortgage-Backed Securities
weighting the mortgage rate of each mortgage
loan in the pool by mortgage outstanding
WAM (weighted-average maturity)
weighting t

FINN 6211 Lecture 5
TypesofTreasurySecurities
TreasuryMarketableTreasurysecurities
arecategorizedasfixedprincipalsecurities
orinflationindexedsecurities.
Fixedincomeprincipalsecuritiesinclude:
Lecture5:MajorFixedIncome
SecuritySectors
i. Treasurybills
i

11/16/2014
4
Analysis of Collateral
A corporate debt obligation can be secured or
unsecured.
In the case of corporate liquidation, bankruptcy
proceeds are distributed to creditors based on
the absolute priority rule (APR).
The claim positions of secur

Sequential-Pay
Tranches (2)
Example: Suppose we form the following sequentialpay tranches from the mortgage portfolio described in
Lecture 6, Example 2: $100M mortgage portfolio,
WAM = 357 months, WAC = 8.125%, PT rate = 7.5%,
and prepayment speed = 165.

11/8/2014
Static Spread (continued)
LECTURE 8
BONDS WITH EMBEDDED OPTIONS
A non-Treasury bonds value, assuming that the cash
flows are riskless, equals the present value of the
replicating portfolio of Treasury securities. In other
words, these cash flow

FINN 6211 HW #2
Due December 5, 2016 (Monday)
Possible Total 200 Points
1. Answer the following questions. (15 points)
a. Comment of the following statement: A senior secured creditor has little risk of realizing a
loss if the issuer goes into bankruptcy.