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Valuation of GNMA Mortgage‐Backed Securities
Author(s) -
DUNN KENNETH B.,
McCONNELL JOHN J.
Publication year - 1981
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1981.tb00647.x
Subject(s) - prepayment of loan , floating interest rate , callable bond , amortizing loan , valuation (finance) , commercial mortgage backed security , mortgage underwriting , coupon , amortization , interest rate , fixed interest rate loan , business , tranche , annuity , actuarial science , economics , financial economics , finance , loan , mortgage insurance , life annuity , non conforming loan , non performing loan , casualty insurance , insurance policy , pension
GNMA mortgage‐backed pass‐through securities are supported by pools of amortizing, callable loans. Additionally, mortgagors often prepay their loans when the market interest rate is above the coupon rate of their loans. This paper develops a model for pricing GNMA securities and uses it to examine the impact of the amortization, call, and prepayment features on the prices, risks and expected returns of GNMA's. The amortization and prepayment features each have a positive effect on price, while the call feature has a negative impact. All three features reduce a GNMA security's interest rate risk and, consequently, its expected return.