Jeslyn V. Dumaran Mr.

Elton Montecillo
BSA-1 May 7, 2019
FM19 5:20-7:00PM

Mortgage-backed securities

Mortgage-backed securities, also known as mortgage-backed bonds, are collateralized by

mortgages, which are often residential mortgages. They’re created by pooling mortgages
purchased from the original lenders. Investors receive monthly interest and principal payments
from the underlying mortgages. Since the principal amount is generally paid down monthly,
mortgage-backed securities differ from traditional bonds in that there isn’t necessarily a
predetermined amount that gets redeemed at a scheduled maturity date.

When you invest in an MBS, you are buying the rights to receive the value of a bundle of
mortgages. That includes the monthly payments and the repayment of the principal. Since it is a
security, you can buy just a part of the mortgage. You receive an equivalent portion of the
payments. An MBS is a derivative because it derives its value from the underlying asset.

 Types of MBS:
 Pass-throughs
 structured as a trust in which mortgage payments are collected and passed
through to investors. Pass-throughs typically have stated maturities of five, 15, and
30 years. Adjustable-rate mortgages (ARM), fixed-rate mortgages and other types
of loans are pooled to create pass-throughs.
 Collateralized mortgage obligations/ CMOs.
 consist of multiple pools of securities, which are known as slices, or tranches. The
tranches are given credit ratings, and the rates that are returned to investors
depend on the tranches.
Bonds

Bonds are fixed-income securities that are issued by corporations and governments to
raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to
them at a fixed (or variable) interest rate for a specified period.

 Types of Bonds
 Treasury bonds

Treasuries are issued by the federal government to finance its budget deficits.
Because they're backed by Uncle Sam's awesome taxing authority, they're considered
credit-risk free. The downside: Their yields are always going to be lowest (except for tax-
free munis). But in economic downturns they perform better than higher-yielding bonds,
and the interest is exempt from state income taxes.

 Other U.S. government bonds

Also called agency bonds, these bonds are issued by federal agencies,
mainly Fannie Mae (FNM) (the Federal National Mortgage Association) and Ginnie
Mae (the Government National Mortgage Association). They're different from the
mortgage-backed securities issued by those same agencies, and by Freddie Mac (FRE)
(the Federal Home Loan Mortgage Corp.). Agency yields are higher than Treasury
yields because they are not full-faith-and-credit obligations of the U.S. government, but
the credit risk is considered minimal. Interest on the bonds is taxable at both the federal
and state levels, however.

 Investment-grade corporate bonds

Investment-grade corporates are issued by companies or financing vehicles with

relatively strong balance sheets. They carry ratings of at least triple-B from Standard &
Poor's, Moody's Investors Service or both. (The scale is triple-A as the highest, followed
by double-A, single-A, then triple-B, and so on.) For investment-grade bonds, the risk of
default is considered pretty remote.
Still, their yields are higher than either Treasury or agency bonds, though like most
agencies they are fully taxable. In economic downturns, these bonds tend to underperform
Treasuries and agencies.
  High-yield bonds

These bonds are issued by companies or financing vehicles with relatively weak
balance sheets. They carry ratings below triple-B. Default is a distinct possibility.

 Foreign bonds

These securities are something else altogether. Some are dollar-denominated, but
the average foreign bond fund has about a third of its assets in foreign-currency-
denominated debt, according to Lipper.
With foreign-currency-denominated bonds, the issuer promises to make fixed
interest payments -- and to return the principal -- in another currency. The size of those
payments when they are converted into dollars depends on exchange rates.

 Mortgage-backed bonds

Mortgage-backeds, which have a face value of $25,000 compared to $1,000 or

$5,000 for other types of bonds, involve "prepayment risk." Because their value drops
when the rate of mortgage prepayments rises, they don't benefit from declining interest
rates like most other bonds do.

 Municipal bonds

Municipal bonds -- often called "munis" are issued by U.S. states and local
governments or their agencies, and they come in both the investment-grade and high-
yield varieties. The interest is tax-free, but that doesn't mean everyone can benefit from
them.

References: (links)
https://www.thestreet.com/story/229831/1/the-different-kinds-of-bonds.html
https://www.thebalance.com/mortgage-backed-securities-types-how-they-work-3305947
https://www.schwab.com/public/schwab/investing/accounts_products/investment/bonds/individual_bonds/mortgage_b
acked_securities
https://www.investopedia.com/terms/m/mbs.asp
https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/bonds/