Yield curve spread

Yield curve spread

Yield curve spread on a simple mortgage-backed security (MBS) is the flat spread over the treasury yield curve required in discounting a pre-determined coupon schedule to arrive at its present market price.

That is, the MBS yield curve spread is based on a comparison of the market price to a model of the bond which includes no variability in interest rate or mortgage repayment rates.

Definition

For mortgage-backed securities, a model of typical repayment rates tends to be given; the PSA formula for a particular Fannie Mae MBS might equate a particular group of mortgages to an 8 year amortizing bond with a 5% mortality per annum. This gives a single series of nominal cash flows (like a riskless bond). If these payments are discounted to net present value with a static treasury yield curve the sum of their values will tend to underestimate the market price of the MBS. The parallel shift, which, if applied to the yield curve makes the NPV of the anticipated receipts equal to the market price "is the Yield curve spread".

Compare

Option adjusted spreadFor mortgage-backed securities, a model of typical repayment rates tends to be given; the PSA formula for a particular Fannie Mae MBS might equate a particular group of mortgages to an 8 year amortizing bond with a 5% mortality per annum. This gives a single series of nominal cash flows (like a riskless bond). If these payments are discounted to net present value with a static treasury yield curve the sum of their values will tend to "overestimate" the market price of the MBS. The parallel shift, which, if applied to the yield curve makes the NPV of the anticipated receipts equal to the market price is the Yield curve spread.

ee also

*Yield spread
*Credit spread (bond)
*Option adjusted spread
*Mortgage yield

References

Hayre, L. 2001, "Salomon Smith Barney Guide to Mortgage-Backed and Asset-Backed Securities", Wiley ISBN 0-471-38587-5


Wikimedia Foundation. 2010.

Игры ⚽ Поможем написать реферат

Look at other dictionaries:

  • Yield curve — This article is about yield curves as used in finance. For the term s use in physics, see Yield curve (physics). Not to be confused with Yield curve spread – see Z spread. The US dollar yield curve as of February 9, 2005. The curve has a typical… …   Wikipedia

  • Yield Curve Risk — The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. The risk is associated with either a flattening or steepening of the yield curve, which is a result of changing yields… …   Investment dictionary

  • Interpolated Yield Curve - I Curve — A yield curve derived by using on the run treasuries. Because on the run treasuries are limited to specific maturities, the yield of maturities that lies between the on the run treasuries must be interpolated. This can be accomplished by a number …   Investment dictionary

  • Spread — may refer to: *Statistical dispersion *Spread (food), an edible paste put on other foods *the score difference being wagered on in spread betting *the measure of line inclination in rational trigonometry *Temperature Dewpoint spread, dew point… …   Wikipedia

  • Flattening of the yield curve — A change in the yield curve where the spread between the yield on a long term and short term Treasury has decreased. Compare steepening of the yield curve and butterfly shift. The New York Times Financial Glossary …   Financial and business terms

  • Steepening of the yield curve — A change in the yield curve where the spread between the yield on a long term and short term Treasury has increased. Compare flattening of the yield curve and butterfly shift. The New York Times Financial Glossary …   Financial and business terms

  • flattening of the yield curve — A change in the yield curve when the spread between the yield on long term and short term Treasuries has decreased. Compare steepening of the yield curve and butterfly shift. Bloomberg Financial Dictionary …   Financial and business terms

  • steepening of the yield curve — A change in the yield curve where the spread between the yield on a long term and short term Treasury has increased. Compare flattening of the yield curve and butterfly shift. Bloomberg Financial Dictionary …   Financial and business terms

  • Spread (finance) — Spread may refer to: *Bid/offer spread, between the buying and selling price of a commodity or security *Spread trade, between two related securities or commodities *Option adjusted spread, on mortgage backed securities where the borrower has the …   Wikipedia

  • Yield spread — In finance, the yield spread is the difference between the quoted rates of return on two different investments, usually of different credit quality.It is a compound of yield and spread.The yield spread of X over Y is simply the percentage return… …   Wikipedia

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”