Mastering Attribution in Finance

19

Annuities and amortising securities

19.1 Introduction

19.2 Prepayments

19.3 Mortgage-backed securities

19.1 INTRODUCTION

An amortising security is superficially similar to a bond, in that it is issued by a borrower who intends to repay the funds to the lender via scheduled payments. Unlike a bond, however, the principal of the loan is repaid over the lifetime of the loan rather than as a single bullet payment at the bond’s maturity.

The best-known amortising security is a mortgage on a house. Typically, the mortgage is structured so that the lender makes equal payments over the lifetime of the loan. These payments are made up of repayments of principal and interest. At the outset, the payments go almost entirely to paying off interest, ...