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Mortgage yield

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Title: Mortgage yield  
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Subject: Bond market, Structured finance, Financial Derivatives, Extendible bond, I-spread
Collection: Fixed Income Analysis, Structured Finance
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Mortgage yield

In finance, mortgage yield is a measure of yield of mortgage-backed bonds. It is also known as cash flow yield. The mortgage yield, or cash flow yield, of a mortgage-backed bond is the monthly compounded discount rate at which net present value of all future cash flows from the bond will be equal to the present price of the bond.[1]

Formula

When the coupon payments are made on a monthly basis, the mortgage yield can be calculated as:

\mbox{Mortgage Yield: ri such that P} = \sum_{n=1}^{N} \frac{C(t)}{(1+ri/1200)^{t-1}}

Where

t - the time of the cash flow
n - each instance of coupon payment
r - the discount rate
C(t) - the net cash flow (the amount of cash) at time t.

Application

Mortgage yields are primarily a tool for comparing mortgage bonds with conventional bonds. The difference between the mortgage-backed bond's yield (generally converted to semi-annually compounded yield to maturity) and a conventional bond is called the "yield spread" or "I-spread."

References

  1. ^ Choudhry, Moorad. Capital Market Instruments: Analysis and Valuation, (FT Press, 2002), p. 208.
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