Mortgage-Backed Securities: A Synopsis

Abstract

Today, mortgage-backed securities and their derivatives are some of the most popular securities held by institutional investors. Detailed explanations of how such securities are formed and valued, though, are usually beyond the scope of most investment textbooks. This paper, in turn, is a pedagogical review of such securities: their features, how mortgage-backed derivatives are constructed to address prepayment risk, and how the binomial model is used to value and analyze these interest-sensitive securities