Mortgage-backed securities

Callable bonds, putable bonds, mortgage-backed securities, and asset-backed securities are examples of (1). Floating-rate securities and inflation-indexed bonds are examples of (2). Convertible bonds and exchangeable bonds are examples of (3). 

Mortgage-backed and asset-backed securities are backed by a pool of loans or receivables. For example, mortgage-backed securities are backed... 

This chapter describes the German mortgage-bonds or Pfandbriefe market, its institutions, and working practice. We also consider other aspects of the European covered bond market. The instruments themselves are essentially plain vanilla bonds, and while they can be analysed in similar ways to US agency bonds and mortgage-backed bonds, there are also key differences between them, which we highlight in this chapter. Mortgage-backed securities are described in Chapter 11. 

While covered bonds are often regarded as similar to asset-backed securities (ABS) and mortgage-backed securities (MBS), many noteworthy differences exist between them ... 

Commercial mortgage-backed securities (CMBS) represent an important and growing sector of the European securitisation market. However, in many cases there are significant differences between transactions, even those backed by collateral from the same originator, and it is these differences, in both collateral types and structural features, that make European CMBS such an interesting asset class. This chapter focuses on some of the more important aspects that investors should consider when analysing the collateral supporting these transactions and briefly looks at the key features of the common transaction structures. 

Convexity is a positive number for most normal bonds. However, for bonds with embedded call options such as mortgage-backed securities, it is always negative. Intuitively, it is obvious that if interest rates fall, the bond prices rise and the option to call the bond turns in the money and is often exercised, which shortens the duration of the bond and hence the rate of change of duration with respect to change in yields is negative. 

A CDO is a bond issued by an SPV that is secured by a pool of debt put by the issuer into a portfolio. As in the ABS, this pool is usually the sole recourse the investors will have for repayment of the notes. The pool may be composed of loans, securities, mortgaged backed securities or other ABSs. 

CASE STUDY EUROPEAN CDO OF MORTGAGE-BACKED SECURITIES ... 

As a way of pooling together all the considerations explored in this chapter, the best way is to demonstrate the major issues through a case study. We will use for this purpose, a CDO of mortgaged-backed securities. 

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