Measuring Yields, Risk, and Risk Premiums on Pass-Through Securities

摘要

This paper describes techniques for measuring the yield, duration, and yield spread on a pass - through security on the basis of anticipated cash flow from that security, emphasizing that alternative assumptions concerning prepayment of the remaining principal balances on the underlying mortgages can have a significant effect on all three measures. In 1970 the Government National Mortgage Association (GNMA) was the only major sponsor of pass - throughs, but by 1978 it had been joined by similar programs of Government and private issuers. Because pass - throughs are likely to become even more significant in the future, it is important to obtain precise answers to yields on pass - throughs, the risk of fluctuations in the principal value, and the yields premium of a pass - through relative to a comparable portfolio of other securities. Using a GNMA pass - through with an 8 - percent certificate rate as an example, this analysis begins by examining the determinants of the cash flow: scheduled payments on the underlying whole mortgages, prepayments of those mortgages, and servicing fees and scheduled payment delays. It then addresses conceptual and quantitative aspects of measuring yield, duration, and yield spread. The paper argues that yield spreads on pass - through securities are best measured by comparing pass - through yields to yields on comparable portfolios of Treasury securities, where comparability is defined in terms of equivalent future cash flows. Graphs and references are included. The appendix explains computing the cash flow on a whole mortgage with prepayments of principal. (Author abstract modified).