Mortgage yield

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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 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]

Contents

[edit] Formula

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

\mbox{Mortgage Yield 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.

[edit] Application

Mortgage yields are primarily a tool for comparing the mortgage bonds market with conventional bonds. The difference between the mortgage backed bond's yield and a conventional bond is called the yield curve spread.

[edit] See Also

[edit] References

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