Not investment advice. Educational reading. See Disclaimer.
L.6 · INTERMEDIATE · 3 MIN
Mortgage-Backed Securities
Mortgage-backed securities are bonds backed by pools of home mortgages. At roughly $10 trillion outstanding, they form the largest segment of the US bond market.
MBS are safe when backed by quality mortgages and honestly rated. The 2008 crisis was not about securitization itself but about the quality of the underlying loans and the failure of rating agencies.
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An MBS (mortgage-backed security) paid yield 5.5% when rates were 6.5%. Rates fall to 4%. The MBS yield falls to 3.8%. Why does the yield fall FASTER than the rate decline?
Five questions · AI feedback
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Sit with the ideas.
You hold an MBS with a 5.5% coupon when market mortgage rates drop from 6% to 4%. What happens to your investment and why?
