Chapter 2
Price Dynamics of Mortgages and Cash Flows
Investors considering an allocation of funds to the mortgage-backed security (MBS) market—no matter in what segment, whether private or agency, or in what form of security, whether interest-only (IO) strip, Federal National Mortgage Association (FNMA) pass-through, or inverse-floater class of collateralized mortgage obligation (CMO) secured by Government National Mortgage Association (GNMA) MBSs—must understand the price dynamics of mortgages and cash flows. To participate, fixed-income investors must be tempted away from the Treasury market, which offers liquid streams of certain cash flows over an uncertain interest-rate environment. The MBS market offers streams of uncertain cash flows over ...
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