Mortgage yield

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]

Formula

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

$\mbox{Mortgage Yield: ri such that P} = \sum_{n=1}^{N} \frac{C(t)}{(1+ri/1200)^{t-1}}$

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.

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.

See also

• Yield curve spread

References

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