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Fixed Income Markets and Their Derivatives, 3rd Edition by Suresh Sundaresan

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Chapter 11

Mortgages, federal agencies, and agency debt

Chapter Summary

This chapter describes residential mortgage contracts. Terms such as loan-to-value ratio (LTV), fixed-rate mortgage (FRM), adjustable-rate mortgage (ARM), and prepayments are explained. Basic mortgage cash flows are derived from first principles, without prepayment assumptions. Mortgage-equivalent rates are calculated using Excel. The role of federal agencies, especially the functions of government-sponsored enterprises (GSEs), are explained in detail.

11.1 Overview of Mortgage Contracts

Home ownership in many countries is achieved through a mortgage, which is, in essence, a secured loan. The family that wants to own a home will typically pledge the home as collateral and borrow ...

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