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‭FINANCIAL MARKETS‬

‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭Yields on Money Market securities‬


‭Chapter 5: Money Markets‬
‭Bond Equivalent Yields (bey)‬

‭Money Markets‬
‭●‬ ‭Bond‬ ‭equivalent‬ ‭yield,‬ ‭𝑖‬‭𝑏𝑒‬‭,‬ ‭is‬ ‭the‬ ‭quoted‬
‭●‬ S ‭ hort-term‬ ‭debt‬ ‭instruments‬ ‭that‬‭is‬‭issued‬‭by‬ ‭nominal, or stated, yield on a security.‬
‭economic‬‭agents‬‭that‬‭require‬‭short-term‬‭funds‬ ‭●‬ U ‭ sed‬ ‭to‬ ‭calculate‬ ‭the‬ ‭present‬ ‭value‬ ‭of‬ ‭an‬
‭and are purchased by economic agents.‬ ‭investment.‬
‭●‬ ‭Money‬ ‭market‬ ‭instruments‬ ‭are‬ ‭traded‬ ‭in‬ ‭●‬ ‭It‬ ‭is‬ ‭the‬ ‭product‬ ‭of‬ ‭the‬ ‭periodic‬ ‭rate‬ ‭and‬ ‭the‬
‭secondary‬ ‭markets.‬ ‭They‬ ‭serve‬ ‭to‬ ‭reallocate‬ ‭number of periods in a year.‬
‭the‬ ‭(relatively)‬ ‭fixed‬ ‭amounts‬ ‭of‬ ‭liquid‬ ‭funds‬
‭available in the market at any particular time.‬ ‭𝑃‬ −‭𝑃‬
‭𝑖‬‭𝑏𝑒‬ = ⎡⎢ ‭𝑓‭𝑃‬ ‬ ‭0‬ ⎤⎥ ×
‭365‬
‭●‬ ‭Efficient‬ ‭in‬ ‭performing‬ ‭service‬ ‭in‬ ‭that‬ ‭they‬
‭𝑛‬
‭enable‬ ‭large‬ ‭amounts‬ ‭of‬ ‭money‬ ‭to‬ ‭be‬ ⎣ ‭0‬ ⎦
‭transferred‬ ‭from‬ ‭supplier‬ ‭of‬ ‭funds‬ ‭to‬‭users‬‭of‬
‭funds‬ ‭for‬ ‭short‬ ‭periods‬ ‭of‬ ‭time‬ ‭both‬ ‭quickly‬ ‭ here‬
W
‭and at low cost to the transacting parties.‬ ‭𝑃‬‭𝑓‬ = ‭‭𝐹
‬ 𝑎𝑐𝑒‬‭‬‭𝑉𝑎𝑙𝑢𝑒‬
‭●‬ ‭Money Market Instruments‬
‭-‬ ‭Provides‬ ‭an‬ ‭opportunity‬ ‭that‬ ‭𝑃‬‭0‬ = ‭‭𝑃
‬ 𝑢𝑟𝑐ℎ𝑎𝑠𝑒‬‭‭𝑃
‬ 𝑟𝑖𝑐𝑒‬‭‭𝑜
‬ 𝑓‬‭‬‭𝑡ℎ𝑒‬‭‬‭𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑦‬
‭generates‬ ‭a‬ ‭higher‬ ‭rate‬ ‭of‬ ‭interest‬ ‭𝑛‬ = ‭‬‭𝑁𝑜‬. ‭‭𝑜
‬ 𝑓‬‭‭𝑑
‬ 𝑎𝑦𝑠‬‭‬‭𝑢𝑛𝑡𝑖𝑙‬‭‬‭𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦‬
‭(return)‬ ‭than‬ ‭holding‬ ‭cash‬ ‭(which‬
‭yields‬ ‭zero‬ ‭interest),‬ ‭but‬ ‭is‬ ‭also‬ ‭very‬
‭liquid‬ ‭and‬ ‭has‬ ‭relatively‬ ‭low‬ ‭default‬ ‭NOTE‬
‭risk.‬
‭ ond equivalent yield does not consider the effects‬
B
‭of compounding of interest during a less than one‬
‭ hy are money markets needed?‬
W ‭year investment horizon.‬
‭The‬ ‭immediate‬ ‭cash‬ ‭needs‬ ‭of‬ ‭individuals,‬
‭corporations,‬ ‭and‬ ‭government‬ ‭do‬ ‭not‬ ‭necessarily‬
‭coincide with their receipts of cash.‬
‭Effective Annual Return (EAR)‬

‭O‬‭pportunity cost‬ ‭●‬ I‭ f‬ ‭interest‬‭is‬‭compounded‬‭more‬‭than‬‭once‬‭per‬


‭●‬ T ‭ he forgone interest cost from the holding of‬ ‭year, the true annual rate earned is EAR.‬
‭cash balances when they are received.‬
‭●‬ ‭Happens due to excessive holding of cash‬ ‭365/‬‭𝑛‬
‭balances.‬ ‭𝑖‬‭𝑏𝑒‬
‭ 𝐴𝑅‬ = ⎡⎢‭1‬ +
𝐸 ⎤
‭365/‬‭𝑛‬ ⎥
− ‭1‬
‭3 Basic Characteristics‬ ⎣ ⎦

‭1.‬ M ‭ oney‬ ‭market‬ ‭instruments‬ ‭are‬ ‭generally‬‭sold‬ ‭Discount Yields (dy)‬


‭in‬‭large denominations.‬
‭2.‬ ‭Money‬‭market‬‭instruments‬‭have‬‭low‬‭default‬ ‭●‬ I‭ nstead‬ ‭of‬ ‭directly‬ ‭received‬ ‭interest‬‭payments‬
‭risk‬‭.‬ ‭over‬ ‭the‬ ‭investment‬ ‭horizon,‬ ‭the‬ ‭return‬ ‭on‬
‭-‬ ‭Risk‬ ‭of‬ ‭late‬ ‭or‬ ‭nonpayment‬ ‭of‬ ‭securities‬‭results‬‭from‬‭the‬‭purchase‬‭of‬‭security‬
‭principal‬ ‭and/or‬ ‭interest‬‭is‬‭generally‬ ‭at‬ ‭a‬ ‭discount‬ ‭from‬ ‭its‬ ‭face‬ ‭value‬ ‭and‬ ‭the‬
‭small.‬ ‭receipt of face value at maturity.‬
‭3.‬ ‭Money‬‭market‬‭securities‬‭must‬‭have‬‭an‬‭original‬ ‭●‬ ‭Yield‬ ‭on‬ ‭securities‬ ‭use‬ ‭a‬ ‭360-day‬ ‭year‬ ‭rather‬
‭maturity of one year or less‬‭.‬ ‭than 365-day year.‬

‭PAGE‬‭1‬ ‭AGA – 3AIS2 – 2024-2025‬


‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭𝑃‬ −‭𝑃‬ ‭Paper‬ ‭ romissory notes issued by a‬


p
‭𝑖‬‭𝑑‬ = ⎡⎢ ‭𝑓‭𝑃‬ ‬ ‭0‬ ⎤⎥ ×
‭360‬
‭𝑛‬ ‭company to raise short-term‬
⎣ ‭𝑓‬ ⎦ ‭cash.‬

‭●‬ D ‭ iscount‬ ‭yield‬ ‭uses‬ ‭the‬ ‭terminal‬‭price,‬‭on‬‭the‬ ‭Negotiable‬ ‭ ank-issued time deposits that‬
B
‭other‬ ‭hand,‬ ‭bond‬ ‭equivalent‬ ‭yields‬ ‭are‬ ‭based‬ ‭certificates of‬ ‭specify an interest rate and‬
‭on the purchase price of a security.‬ ‭deposits‬ ‭maturity date and are‬
‭●‬ ‭An‬‭appropriate‬‭comparison‬‭of‬‭interest‬‭rates‬‭on‬ ‭negotiable (saleable on‬
‭discount‬ ‭securities‬ ‭versus‬ ‭nondiscount‬ ‭secondary market)‬
‭securities,‬‭requires‬‭converting‬‭a‬‭discount‬‭yield‬
‭into a bond equivalent yield:‬ ‭Banker’s‬ ‭ ime drafts payable to a seller‬
T
‭Acceptance‬ ‭of goods, with payment‬
‭guaranteed by a bank.‬
‭𝑃‬‭𝑓‬ ‭ 65‬
3
‭𝑖‬‭𝑏𝑒‬ = ‭𝑖‬‭𝑑‬ × ‭𝑃‬‭𝑜‬
× ‭360‬
‭TREASURY BILLS‬

‭Single Payment Yields (spy)‬ ‭●‬ I‭ ssued‬ ‭to‬ ‭refinance‬ ‭maturing‬ ‭government‬
‭debt.‬
‭●‬ ‭Special‬ ‭cases‬ ‭of‬ ‭the‬ ‭pure‬ ‭discount‬ ‭securities‬ ‭●‬ ‭Virtually‬ ‭default‬ ‭risk‬ ‭free,‬ ‭referred‬ ‭to‬ ‭as‬ ‭the‬
‭that only pay the face value on maturity.‬ ‭risk free asset.‬
‭●‬ Q ‭ uoted‬ ‭nominal‬ ‭interest‬ ‭rates‬ ‭on‬ ‭●‬ ‭Have little interest rate risk and liquidity risk.‬
‭single-payment‬ ‭securities‬ ‭assume‬ ‭a‬ ‭360-day‬ ‭●‬ ‭Treasury Bill Asked Discount Yield‬
‭year.‬ ‭Example:‬
‭●‬ ‭In‬ ‭order‬ ‭to‬ ‭compare‬ ‭interest‬ ‭rates‬ ‭on‬ ‭these‬ ‭Suppose‬ ‭that‬ ‭you‬ ‭purchase‬ ‭the‬ ‭T-bill‬
‭securities‬ ‭with‬ ‭others‬ ‭that‬ ‭pay‬ ‭interest‬ ‭based‬ ‭maturing‬ ‭on‬ ‭October‬ ‭24,‬ ‭2013,‬ ‭for‬
‭on‬ ‭a‬ ‭365-day‬ ‭year,‬ ‭the‬ ‭nominal‬ ‭interest‬ ‭rate‬ ‭$9,998.599.‬‭The‬‭T-bill‬‭matures‬‭123‬‭days‬‭after‬
‭must be converted to bond equivalent yield:‬ ‭the‬ ‭settlement‬ ‭date,‬‭June‬‭23,‬‭2013,‬‭and‬‭has‬‭a‬
‭face‬ ‭value‬ ‭of‬ ‭$10,000.‬ ‭The‬ ‭T-bill’s‬ ‭asked‬
‭discount yield is reported as:‬
‭ 65‬
3
‭𝑖‬‭𝑏𝑒‬ = ‭𝑖‬‭𝑠𝑝𝑦‬ × ‭360‬

‭The bond equivalent yield or asked yield is‬


‭Money Market Instruments‬

‭Finally, the EAR on the T-bill is calculated as‬


‭Treasury Bills‬ ‭ hort-term obligations issued‬
S
‭by government.‬

‭Federal Funds‬ ‭ hort-term funds transferred‬


S
‭FEDERAL FUNDS‬
‭between financial institutions‬
‭usually for no more than one‬ ‭●‬ T ‭ he‬‭overnight‬‭(or‬‭one‬‭day)‬‭interest‬‭rate‬‭in‬‭the‬
‭day.‬ ‭interbank‬ ‭lending‬ ‭market‬ ‭is‬ ‭the‬ ‭federal‬‭funds‬
‭rate.‬
‭ epurchase‬
R ‭ greements involving the sale‬
A ‭●‬ ‭Feerald‬ ‭funds‬ ‭transactions‬ ‭take‬ ‭the‬ ‭form‬ ‭of‬
‭Agreement‬ ‭of securities by one party to‬ ‭short-term‬ ‭(mostly‬ ‭overnight)‬ ‭unsecured‬
‭another with a promise to‬ ‭loans.‬
‭repurchase the securities at a‬ ‭●‬ ‭Important‬‭because‬‭it‬‭is‬‭a‬‭focus‬‭or‬‭target‬‭rate‬‭in‬
‭specified date and price.‬ ‭the conduct of monetary policy.‬
‭●‬ ‭Federal Funds Yields‬
‭Commercial‬ ‭Short-term unsecured‬

‭PAGE‬‭2‬ ‭AGA – 3AIS2 – 2024-2025‬


‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭●‬ C ‭ ompanies‬ ‭with‬ ‭strong‬ ‭credit‬ ‭ratings‬ ‭can‬


‭generally‬ ‭borrow‬ ‭money‬ ‭at‬ ‭a‬ ‭lower‬ ‭interest‬
‭ xample:‬
E ‭rate‬ ‭by‬ ‭issuing‬ ‭commercial‬ ‭paper‬ ‭than‬ ‭by‬
‭The‬‭overnight‬‭fed‬‭funds‬‭rate‬‭on‬‭June‬‭21,‬‭2013,‬ ‭directly borrowing (via loans) from banks.‬
‭was‬ ‭0.13‬ ‭percent.‬ ‭The‬ ‭conversion‬ ‭of‬ ‭the‬ ‭fed‬ ‭●‬ ‭No‬ ‭active‬ ‭secondary‬ ‭market‬ ‭for‬ ‭commercial‬
‭funds‬ ‭rate‬ ‭to‬ ‭a‬ ‭bond‬ ‭equivalent‬ ‭rate‬ ‭is‬ ‭paper.‬ ‭Because‬ ‭commercial‬ ‭paper‬ ‭is‬ ‭not‬
‭calculated as follows:‬ ‭actively‬ ‭traded‬ ‭and‬ ‭because‬ ‭it‬ ‭is‬ ‭also‬
‭unsecured debt.‬
‭●‬ ‭Generally‬ ‭held‬ ‭by‬ ‭investors‬ ‭from‬ ‭the‬ ‭time‬ ‭of‬
‭issue until maturity.‬
‭ emembering‬‭that‬‭fed‬‭funds‬‭are‬‭generally‬‭lent‬
R ‭●‬ ‭Yield on Commercial Paper‬
‭for‬‭one‬‭day,‬‭the‬‭EAR‬‭on‬‭the‬‭fed‬‭funds‬‭can‬‭then‬ ‭Example:‬
‭be calculated as:‬ ‭Suppose‬ ‭an‬ ‭investor‬ ‭purchases‬ ‭95-day‬
‭commercial‬ ‭paper‬ ‭with‬ ‭a‬ ‭par‬ ‭value‬ ‭of‬
‭$1,000,000‬ ‭for‬ ‭a‬ ‭price‬ ‭of‬ ‭$990,023.‬ ‭The‬
‭discount‬‭yield‬‭(‬‭d‬‭)‬‭on‬‭the‬‭commercial‬‭paper‬‭is‬
‭calculated as:‬
‭REPURCHASE AGREEMENT‬

‭●‬ E ‭ ssentially‬‭a‬‭collateralized‬‭fed‬‭funds‬‭loan,‬‭with‬
‭the‬ ‭collateral‬ ‭(held‬ ‭by‬ ‭the‬ ‭repo‬ ‭seller)‬ ‭taking‬ ‭And te bond equivalent yield (bey) is:‬
‭the form of securities.‬
‭●‬ ‭Reverse‬ ‭repurchase‬ ‭agreement‬ ‭(reverse‬ ‭repo)‬
‭is‬‭the‬‭lender’s‬‭position‬‭in‬‭the‬‭repo‬‭transaction.‬
‭Finally, the EAR on the commercial paper is:‬
‭It‬ ‭is‬ ‭an‬ ‭agreement‬ ‭involving‬ ‭the‬ ‭purchase‬
‭(buying)‬ ‭of‬ ‭securities‬ ‭by‬ ‭one‬ ‭party‬ ‭from‬
‭another‬‭with‬‭the‬‭promise‬‭to‬‭sell‬‭them‬‭back‬‭at‬‭a‬
‭given date in the future.‬
‭●‬ ‭Generally‬‭matures‬‭from‬‭1‬‭to‬‭14‬‭days.‬‭But‬‭there‬
‭is‬ ‭a‬ ‭growing‬ ‭market‬ ‭for‬ ‭longer-term,‬ ‭1‬ ‭to‬ ‭3‬ ‭ EGOTIABLE CERTIFICATES OF‬
N
‭months.‬ ‭DEPOSITS‬
‭●‬ ‭Repurchase‬ ‭agreements‬ ‭are‬ ‭less‬ ‭liquid‬ ‭than‬ ‭●‬ b ‭ ank-issued‬ ‭time‬ ‭deposit‬ ‭that‬ ‭specifies‬ ‭an‬
‭fed funds.‬ ‭interest‬ ‭rate‬ ‭and‬ ‭maturity‬ ‭date‬ ‭and‬ ‭is‬
‭●‬ ‭Nonbanks‬ ‭are‬ ‭more‬ ‭frequent‬ ‭users‬ ‭of‬ ‭negotiable‬ ‭(i.e.,‬ ‭salable)‬ ‭in‬ ‭the‬ ‭secondary‬
‭repurchase agreements.‬ ‭market.‬
‭●‬ ‭Repurchase Agreement Yield‬ ‭●‬ ‭Can‬ ‭be‬ ‭traded‬ ‭any‬ ‭number‬ ‭of‬ ‭times‬ ‭in‬
‭Example:‬ ‭secondary‬ ‭markets;‬ ‭therefore,‬ ‭the‬ ‭original‬
‭Suppose‬ ‭a‬ ‭bank‬ ‭enters‬ ‭a‬ ‭reverse‬ ‭repurchase‬ ‭buyer is not necessarily the owner at maturity.‬
‭agreement‬ ‭in‬ ‭which‬‭it‬‭agrees‬‭to‬‭buy‬‭fed‬‭funds‬ ‭●‬ ‭Maturities‬ ‭range‬ ‭from‬ ‭two‬ ‭weeks‬‭to‬‭one‬‭year,‬
‭from‬‭one‬‭of‬‭its‬‭correspondent‬‭banks‬‭at‬‭a‬‭price‬ ‭with‬ ‭most‬ ‭having‬ ‭a‬ ‭maturity‬ ‭of‬ ‭one‬ ‭to‬ ‭four‬
‭of‬‭$10,000,000,‬‭with‬‭the‬‭promise‬‭to‬‭sell‬‭these‬ ‭months.‬
‭funds‬ ‭back‬ ‭at‬ ‭a‬ ‭price‬ ‭of‬ ‭$10,000,291.67‬ ‭●‬ ‭Negotiated‬ ‭between‬ ‭the‬ ‭bank‬ ‭and‬ ‭the‬ ‭CD‬
‭($10,000,000‬ ‭plus‬ ‭interest‬ ‭of‬ ‭$291.67)‬ ‭after‬ ‭buyer.‬
‭five‬‭days.‬‭The‬‭yield‬‭on‬‭this‬‭repo‬‭to‬‭the‬‭bank‬‭is‬ ‭●‬ ‭Negotiable‬ ‭CDs‬ ‭are‬‭single-payment‬‭securities.‬
‭calculated as follows:‬ ‭Thus,‬ ‭interest‬ ‭rates‬ ‭on‬ ‭negotiable‬ ‭CDs‬ ‭are‬
‭generally quoted using a 360-day year.‬
‭●‬ ‭Secondary‬ ‭market‬ ‭Yield‬ ‭on‬ ‭Negotiable‬
‭CD‬
‭COMMERCIAL PAPER‬ ‭Example:‬
‭A‬ ‭bank‬ ‭has‬ ‭issued‬ ‭a‬ ‭six-month,‬ ‭$1‬ ‭million‬
‭●‬ O
‭ ne‬ ‭of‬ ‭the‬ ‭largest‬ (‭ in‬ ‭terms‬ ‭of‬ ‭dollar‬ ‭value‬ ‭negotiable‬ ‭CD‬ ‭with‬ ‭a‬ ‭0.72‬ ‭percent‬ ‭quoted‬
‭outstanding)‬ ‭of‬ t‭ he‬ ‭money‬ ‭market‬ ‭annual‬‭interest‬‭rate.‬‭The‬‭bond‬‭equivalent‬‭yield‬
‭instruments.‬ ‭on the CD is:‬

‭PAGE‬‭3‬ ‭AGA – 3AIS2 – 2024-2025‬


‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭ rincipal Investor:‬‭brokers and dealers,‬


P
‭mutual funds, corporations, other Fis,‬
‭ hus,‬‭at‬‭maturity‬‭(in‬‭6‬‭months)‬‭the‬‭CD‬‭holder‬
T ‭individuals‬
‭will receive:‬ ‭5.‬ ‭Negotiable CDs‬
‭Principal Issuer:‬‭Commercial banks‬
‭Principal Investor:‬‭Brokers and dealers,‬
I‭ n‬ ‭exchange‬ ‭for‬ ‭$1‬ ‭million‬ ‭deposited‬ ‭in‬ ‭the‬ ‭mutual funds, corporations, other FIs,‬
‭bank today. Further, the EAR on the CD is:‬ ‭individuals‬
‭ .‬ ‭Banker’s Acceptances‬
6
‭Principal Issuer:‬‭Commercial banks‬
‭Principal Investor:‬‭Commercial banks,‬
I‭ mmediately‬ ‭after‬ ‭the‬ ‭CD‬ ‭is‬ ‭issued,‬ ‭the‬ ‭brokers and dealers, corporations‬
‭secondary‬ ‭market‬ ‭price‬ ‭on‬ ‭the‬ ‭$1‬ ‭million‬ ‭CD‬
‭falls‬ ‭to‬ ‭$999,651.‬ ‭As‬ ‭a‬ ‭result,‬ ‭the‬ ‭secondary‬
‭market bond equivalent yield on the $1 million‬ ‭Treasury‬ ‭ llow the government to raise‬
A
‭face value CD increases as follows:‬ ‭money to meet unavoidable‬
‭short-term expenditure needs‬
‭prior to the receipt of tax‬
‭revenues.‬
‭The single-payment yield increases to:‬
‭Federal‬ ‭ ost important participant in‬
M
‭ eserve‬
R ‭the money markets. It holds‬
‭And the EAR becomes:‬ ‭T-bills, T-notes, and T-bonds.‬

‭ ften uses repurchase‬


O
‭agreements and reverse repos to‬
‭BANKER’S ACCEPTANCE‬
‭temporarily smooth interest‬
‭●‬ A ‭ ‬ ‭time‬ ‭draft‬ ‭payable‬‭to‬‭a‬‭seller‬‭of‬‭goods,‬‭with‬ ‭rates and the money supply.‬
‭payment guaranteed by a bank.‬
‭●‬ ‭Time‬‭drafts‬‭issued‬‭by‬‭a‬‭bank‬‭are‬‭orders‬‭for‬‭the‬ ‭Commercial‬ ‭ ost diverse group of‬
M
‭bank‬ ‭to‬ ‭pay‬ ‭a‬ ‭specified‬ ‭amount‬ ‭of‬ ‭money‬ ‭to‬ ‭Banks‬ ‭participants in the money‬
‭the bearer of the time draft on a given date.‬ ‭markets.‬

‭ he importance of banks in the‬


T
‭Money Market Participants‬ ‭money markets is driven in part‬
‭by their need to meet‬
‭1.‬ T ‭ reasury Bills‬ ‭reserve requirements imposed by‬
‭Principal Issuer:‬‭Government Treasury‬ ‭regulation.‬
‭Principal Investor:‬‭Federal reserve system,‬
‭commercial banks, mutual banks, brokers and‬
‭Money‬ ‭ oney market mutual funds‬
M
‭dealers, other FIs, corporations, individuals‬
‭ arket‬
M ‭purchase large amounts of‬
‭2.‬ ‭Federal Funds‬
‭Mutual‬ ‭money market securities and sell‬
‭Principal Issuer:‬‭Commercial banks‬
‭Funds‬ ‭shares in these pools based on‬
‭Principal Investor:‬‭Commercial banks‬
‭the value of their underlying‬
‭3.‬ ‭Repurchase Agreements‬
‭(money market) securities. It‬
‭Principal Issuer:‬‭Federal Reserve System,‬
‭allows small investors to invest‬
‭Commercial banks, brokers and dealers, other‬
‭in money market instruments.‬
‭FIs‬
‭Principal Investor:‬‭Federal reserve systems,‬
‭Brokers &‬ I‭ mportant to the smooth‬
‭Commercial banks, Mutual funds, brokers and‬
‭Dealers‬ ‭functioning of money markets.‬
‭dealers, other FIs, Corporations‬
‭Includes primary government‬
‭4.‬ ‭Commercial Paper‬
‭security dealers, money and‬
‭Principal Issuer:‬‭commercial banks, other FIs,‬
‭security brokers, and thousands‬
‭Corporations‬

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‭FINANCIAL MARKETS‬
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‭1.‬ ‭Collateral‬
‭ f brokers and dealers who acts‬
o ‭-‬ ‭As‬ ‭part‬ ‭of‬ ‭the‬ ‭mortgage‬ ‭agreement,‬
‭as intermediaries in the money‬ ‭the‬ ‭financial‬ ‭institution‬ ‭will‬ ‭place‬ ‭a‬
‭markets by linking buyers and‬ ‭lien‬‭against‬‭a‬‭property‬‭that‬‭remains‬‭in‬
‭sellers.‬ ‭place until the loan is fully paid off.‬
‭-‬ ‭Lien‬‭is‬‭a‬‭public‬‭record‬‭attached‬‭to‬‭the‬
‭Corporations‬ T
‭ he ones who raise large‬ ‭title‬ ‭of‬ ‭the‬ ‭property‬ ‭tha‬ ‭gives‬‭FIs‬‭the‬
‭amounts of funds in the money‬ ‭right‬ ‭to‬ ‭sell‬ ‭the‬ ‭property‬ ‭if‬ ‭the‬
‭markets,‬ ‭mortgage‬ ‭borrower‬ ‭defaults‬ ‭or‬ ‭falls‬
‭primarily in the form of‬ ‭into arrears on his/her payments.‬
‭commercial paper.‬ ‭2.‬ ‭Down Payment‬
‭-‬ ‭As‬ ‭part‬ ‭of‬ ‭any‬‭mortgage‬‭agreement,‬‭a‬
‭Other FIs‬ ‭ ecause their liability payments‬
B ‭financial‬ ‭institution‬ ‭requires‬ ‭the‬
‭are relatively unpredictable,‬ ‭mortgage‬‭borrower‬‭to‬‭pay‬‭a‬‭portion‬‭of‬
‭property-casualty (PC)‬ ‭the‬ ‭purchase‬ ‭price‬ ‭of‬ ‭the‬ ‭property‬ ‭(a‬
‭insurance companies, and to a‬ ‭down‬‭payment‬‭)‬‭at‬‭the‬‭closing‬‭(the‬‭day‬
‭lesser extent life insurance‬ ‭the mortgage is issued).‬
‭companies, must maintain large‬ ‭-‬ ‭Decreases‬ ‭the‬ ‭probability‬ ‭that‬ ‭the‬
‭balances of liquid assets.‬ ‭borrower will default on the mortgage.‬
‭-‬ ‭Generally,‬‭a‬‭20‬‭percent‬‭down‬‭payment‬
‭Individuals‬ ‭ hey participate in the money‬
T ‭is required.‬
‭markets through direct‬ ‭3.‬ ‭Insured versus Conventional Mortgages‬
‭investments in these securities or‬ ‭-‬ ‭Mortgages‬ ‭are‬ ‭classified‬ ‭as‬ ‭either‬
‭through investments in money‬ ‭federally insured or conventional.‬
‭market mutual funds, which‬ ‭-‬ ‭Federally‬ ‭insured‬ ‭mortgages‬
‭contain a mix of all types of‬ ‭originated‬ ‭by‬ ‭FIs,‬ ‭but‬ ‭repayment‬ ‭is‬
‭money market securities.‬ ‭guaranteed‬ ‭by‬ ‭either‬ ‭the‬ ‭Federal‬
‭Housing‬ ‭Administration‬ ‭or‬ ‭the‬
‭Veterans Administration.‬
‭Chapter 7: Mortgage Markets‬ ‭-‬ ‭Conventional‬ ‭mortgages‬
‭mortgages‬ ‭held‬ ‭by‬ ‭FIs‬ ‭and‬ ‭are‬ ‭not‬
‭federally‬ ‭insured,‬ ‭but‬ ‭they‬ ‭generally‬
‭Primary Mortgage Markets‬ ‭are‬‭required‬‭to‬‭be‬‭privately‬‭insured‬‭if‬
‭the‬ ‭borrower’s‬ ‭down‬ ‭payment‬ ‭is‬ ‭less‬
‭●‬ ‭Mortgage‬ ‭than‬ ‭20‬ ‭percent‬ ‭of‬ ‭the‬ ‭property’s‬
‭-‬ ‭Loans to individuals or business to‬ ‭value.‬
‭purchase a home, land, or other real‬ ‭4.‬ ‭Mortgage Maturities‬
‭property.‬ ‭-‬ ‭A‬ ‭mortgage‬ ‭generally‬ ‭has‬ ‭an‬ ‭original‬
‭-‬ ‭The property purchased with the loan‬ ‭maturity of either 15 or 30 years.‬
‭serves as collateral backing the loan.‬ ‭-‬ ‭FIs‬ ‭find‬ ‭the‬ ‭15-year‬ ‭mortgage‬
‭attractive‬ ‭because‬ ‭of‬ ‭the‬‭lower‬‭degree‬
‭4 Basic Categories of Mortgages‬ ‭of‬ ‭interest‬ ‭rate‬ ‭risk‬ ‭on‬ ‭a‬ ‭15-year‬
‭relative to a 30-year mortgage.‬
1‭ .‬ ‭ ome‬
H ‭-‬ ‭Most‬‭mortgages‬‭allow‬‭the‬‭borrower‬‭to‬
‭2.‬ ‭Multifamily dwelling‬ ‭prepay‬ ‭all‬ ‭or‬ ‭part‬ ‭of‬ ‭the‬ ‭mortgage‬
‭3.‬ ‭Commercial‬ ‭principal early without penalty.‬
‭4.‬ ‭farm‬ ‭-‬ ‭In‬‭general,‬‭the‬‭monthly‬‭payment‬‭is‬‭set‬
‭at‬ ‭a‬ ‭fixed‬ ‭level‬ ‭to‬ ‭repay‬ ‭interest‬ ‭and‬
‭principal‬ ‭on‬ ‭the‬ ‭mortgage‬ ‭by‬ ‭the‬
‭Mortgage Characteristics‬ ‭maturity date.‬
‭-‬ ‭Balloon‬ ‭payment‬ ‭mortgages‬
‭●‬ U
‭ nique‬‭as‬‭capital‬‭market‬‭instruments‬‭because‬ ‭requires‬ ‭a‬ ‭fixed‬ ‭monthly‬ ‭interest‬
‭the‬ ‭characteristics‬ ‭of‬ ‭each‬ ‭mortgage‬ ‭held‬ ‭by‬ ‭payment‬ ‭(and,‬ ‭sometimes,‬ ‭principal‬
‭FIs can differ.‬

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‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭payments)‬ ‭for‬ ‭a‬ ‭three-‬ ‭to‬ ‭five-year‬


‭ eriod.‬
p ‭Appraisal Fee‬ ‭ overs the remaining costs to‬
C
‭ .‬ ‭Interest Rates‬
5 ‭the mortgage issuer for‬
‭-‬ ‭Most‬ ‭important‬ ‭characteristic‬ ‭processing the mortgage‬
‭identified in a mortgage contract.‬ ‭application and completing‬
‭-‬ ‭Mortgage‬ ‭borrowers‬ ‭often‬‭decide‬‭how‬ ‭the loan.‬
‭much‬‭to‬‭borrow‬‭and‬‭from‬‭whom‬‭solely‬
‭by‬ ‭looking‬ ‭at‬ ‭the‬ ‭quoted‬ ‭mortgage‬ ‭Loan‬ ‭ overs the remaining costs to‬
C
‭rates of several FIs.‬ ‭Origination Fee‬ ‭the mortgage issuer for‬
‭-‬ ‭Fixed‬ ‭versus‬ ‭Adjustable-Rate‬ ‭processing the mortgage‬
‭Mortgages‬ ‭application and completing‬
‭★‬ ‭fixed-rate‬ ‭mortgage‬ ‭locks‬ ‭in‬ ‭the loan.‬
‭the‬ ‭borrower’s‬ ‭interest‬ ‭rate‬
‭and‬ ‭thus‬ ‭required‬ ‭monthly‬ ‭Closing Agent‬ C‭ overs the costs of the closing‬
‭payments‬ ‭over‬ ‭the‬ ‭life‬ ‭of‬ ‭the‬ ‭and Review fees‬ ‭agent who actually closes the‬
‭mortgage,‬ ‭regardless‬ ‭of‬ ‭how‬ ‭mortgage.‬
‭market rates change.‬
‭★‬ ‭Adjustable-rate‬ ‭mortgage‬ ‭Other Costs‬ ‭ ny other fees, such as VA‬
A
‭(ARM)‬‭is‬‭tied‬‭to‬‭some‬‭market‬ ‭loan guarantees, of FHA or‬
‭interest‬ ‭rate‬ ‭or‬ ‭interest‬ ‭rate‬ ‭private mortgage insurance.‬
‭index.‬ ‭Thus,‬ ‭the‬ ‭required‬
‭monthly‬ ‭payments‬ ‭can‬
‭change‬ ‭over‬ ‭the‬ ‭life‬ ‭of‬ ‭the‬ ‭Mortgage Refinancing‬
‭mortgage.‬
‭-‬ ‭Discount Points‬ ‭●‬ O ‭ ccurs‬‭when‬‭a‬‭mortgage‬‭borrower‬‭takes‬‭out‬‭a‬
‭★‬ ‭fees‬ ‭or‬ ‭payments‬ ‭made‬‭when‬ ‭new‬‭mortgage‬‭and‬‭uses‬‭the‬‭proceeds‬‭obtained‬
‭a‬ ‭mortgage‬ ‭loan‬‭is‬‭issued‬‭(at‬ ‭to pay off the current mortgage.‬
‭closing).‬ ‭●‬ ‭Refinancing‬‭involves‬‭many‬‭of‬‭the‬‭same‬‭details‬
‭★‬ ‭One‬ ‭discount‬ ‭point‬ ‭paid‬ ‭up‬ ‭and‬ ‭steps‬ ‭involved‬ ‭in‬ ‭applying‬ ‭for‬ ‭a‬ ‭new‬
‭front‬ ‭is‬ ‭equal‬ ‭to‬ ‭1‬ ‭percent‬ ‭of‬ ‭mortgage‬ ‭and‬ ‭can‬ ‭involve‬ ‭many‬ ‭of‬ ‭the‬ ‭same‬
‭the‬ ‭principal‬ ‭value‬ ‭of‬ ‭the‬ ‭fees and expenses.‬
‭mortgage.‬ ‭●‬ ‭Mortgages‬ ‭are‬ ‭most‬ ‭often‬ ‭refinanced‬ ‭when‬ ‭a‬
‭current‬ ‭mortgage‬ ‭has‬ ‭an‬ ‭interest‬ ‭rate‬ ‭that‬ ‭is‬
‭higher than the current interest rate.‬
‭Other Fees‬

‭●‬ M
‭ ortgage‬ ‭contracts‬ ‭generally‬ ‭require‬ ‭the‬ ‭Mortgage Amortization‬
‭borrower‬‭to‬‭pay‬‭an‬‭assortment‬‭of‬‭fees‬‭to‬‭cover‬
‭the‬ ‭mortgage‬ ‭issuer’s‬ ‭costs‬ ‭of‬ ‭processing‬ ‭the‬ ‭●‬ T ‭ he‬ ‭fixed‬ ‭monthly‬ ‭payment‬ ‭made‬ ‭by‬ ‭a‬
‭mortgage.‬ ‭mortgage‬‭borrower‬‭generally‬‭consists‬‭partly‬‭of‬
‭repayment‬ ‭of‬ ‭the‬ ‭principal‬ ‭borrowed‬ ‭and‬
‭Application Fee‬ C
‭ overs the issuer’s initial costs‬ ‭partly‬ ‭of‬ ‭the‬ ‭interest‬ ‭on‬ ‭the‬ ‭outstanding‬
‭of processing the mortgage‬ ‭balance of the mortgage.‬
‭application and obtaining a‬ ‭●‬ ‭Amortization‬ ‭Schedule‬ ‭s‬‭hows‬ ‭how‬ ‭the‬
‭credit report.‬ ‭fixed‬ ‭monthly‬ ‭payments‬ ‭are‬ ‭split‬ ‭between‬
‭principal and interest.‬
‭Title Search‬ ‭ onfirms the borrower’s legal‬
C
‭ownership of the mortgaged‬ ‭𝑡‬
‭1‬ ‭𝑗‬
‭property and ensures there‬
‭are no outstanding claims‬
‭𝑃𝑉‬ = ‭𝑃𝑀𝑇‬ ∑
‭𝑗=
‬ ‭1‬
( )
‭1+
‬ ‭𝑟‬
‭𝑡‬
‭against the property.‬ ‭𝑃𝑀𝑇‬ = ({ [
‭1‬ − ‭1/‬(‭1‬ + ‭𝑟)‬ ]}‭/‭𝑟‬ ‬)
‭Title Insurance‬ ‭ rotects the lender against an‬
P
‭ here‬
W
‭error in the title search.‬
‭PV = Principal amount borrowed throughthe mortgage‬

‭PAGE‬‭6‬ ‭AGA – 3AIS2 – 2024-2025‬


‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭ MT = Monthly mortgage payment‬


P
‭r = Month interest rate on the mortgage‬
‭t = No. of months over the life of the mortgage‬

‭ xample:‬
E
‭You‬ ‭plan‬ ‭to‬ ‭purchase‬ ‭a‬ ‭house‬ ‭for‬ ‭$150,000‬
‭using‬ ‭a‬ ‭30-year‬ ‭mortgage‬ ‭obtained‬ ‭from‬
‭your‬ ‭local‬ ‭bank.‬ ‭The‬ ‭mortgage‬ ‭rate‬‭offered‬‭to‬
‭you‬ ‭is‬ ‭8%‬ ‭with‬ ‭zero‬ ‭points.‬ ‭In‬ ‭order‬‭to‬‭forgo‬
‭the‬ ‭purchase‬ ‭of‬ ‭private‬ ‭mortgage‬ ‭insurance,‬
‭you‬ ‭will‬ ‭make‬ ‭a‬ ‭down‬ ‭payment‬ ‭of‬ ‭20%‬ ‭of‬
‭the‬ ‭purchase‬ ‭price‬ ‭($30,000‬ ‭=‬ ‭0.20‬ ‭×‬
‭$150,000)‬ ‭at‬ ‭closing‬ ‭and‬ ‭borrow‬ ‭$120,000‬
‭through the mortgage.‬

‭ he‬ ‭monthly‬ ‭payments‬ ‭on‬ ‭this‬ ‭mortgage‬ ‭are‬


T
‭calculated‬ ‭using‬ ‭the‬ ‭time‬ ‭value‬ ‭of‬ ‭money.‬ ‭Other types of Mortgages‬
‭Specifically,‬‭the‬‭amount‬‭borrowed‬‭through‬‭the‬
‭1.‬ J ‭ umbo‬ ‭Mortgages‬ ‭-‬ ‭Mortgages‬ ‭that‬ ‭exceed‬
‭mortgage‬ ‭represents‬ ‭a‬ ‭present‬ ‭value‬ ‭of‬ ‭the‬
‭the conventional mortgage conforming limits.‬
‭principal,‬‭and‬‭the‬‭monthly‬‭payments‬‭represent‬
‭2.‬ ‭Subprime‬ ‭Mortgages‬ ‭-‬ ‭Mortgages‬ ‭to‬
‭a‬ ‭monthly‬ ‭annuity‬ ‭payment.‬ ‭The‬ ‭equation‬
‭borrowers‬ ‭who‬ ‭do‬ ‭not‬ ‭qualify‬ ‭for,‬ ‭prime‬
‭used‬‭to‬‭calculate‬‭your‬‭fixed‬‭monthly‬‭mortgage‬
‭mortgages‬ ‭because‬ ‭of‬ ‭weakened‬ ‭credit‬
‭payments‬‭to‬‭pay‬‭off‬‭the‬‭$120,000‬‭mortgage‬‭at‬
‭histories,‬ ‭including‬ ‭payment‬ ‭delinquencies‬
‭an‬ ‭8%‬ ‭annual‬ ‭(8%/12‬ ‭=‬ ‭0.6667%‬ ‭monthly)‬
‭and‬ ‭possibly‬ ‭more‬ ‭severe‬ ‭problems‬ ‭such‬ ‭as‬
‭interest‬ ‭rate‬ ‭over‬ ‭30‬ ‭years‬ ‭(or‬ ‭30‬ ‭×‬‭12‬‭=‬‭360‬
‭charge-offs, judgements, and bankruptcies.‬
‭payments) is as follows:‬
‭3.‬ ‭Alt-A‬ ‭Mortgages‬ ‭-‬ ‭short‬ ‭for‬ ‭Alternative‬
‭A-paper,‬ ‭mortgages‬ ‭that‬ ‭are‬ ‭considered‬ ‭more‬
‭Therefore:‬ ‭riskythan‬‭a‬‭prime‬‭mortgage‬‭and‬‭less‬‭risky‬‭than‬
‭a subprime mortgage.‬
‭4.‬ ‭Option‬ ‭ARMs‬ ‭-‬ ‭also‬ ‭called‬ ‭pick-a-payment‬
‭Thus, the monthly payment is $880.52‬ ‭or‬ ‭pay-option‬ ‭ARMs,‬ ‭are‬ ‭15-‬ ‭or‬ ‭30-year‬
‭adjustable‬ ‭rate‬ ‭mortgages‬ ‭that‬ ‭offer‬ ‭the‬
‭borrower‬‭several‬‭monthly‬‭payments‬‭options.‬‭It‬
‭has 4 major types of payment.‬
‭★‬ ‭Minimum‬ ‭Payment‬ ‭Option‬ ‭is‬ ‭the‬
‭lowest‬ ‭and‬ ‭carries‬‭the‬‭most‬‭risk.‬‭It‬‭is‬
‭1% fully amortized.‬
‭★‬ ‭Interest-Only‬ ‭Payment‬ ‭requires‬
‭borrower‬ ‭to‬ ‭pay‬ ‭only‬ ‭the‬ ‭interest‬ ‭on‬
‭the‬ ‭loan‬ ‭during‬ ‭the‬ ‭initial‬ ‭period‬ ‭of‬
‭the‬ ‭loan.‬ ‭During‬ ‭this‬ ‭period,‬ ‭no‬
‭principal‬ ‭must‬ ‭be‬ ‭repaid.‬ ‭After‬ ‭the‬
‭interest-only‬ ‭period,‬ ‭the‬ ‭mortgage‬
‭must‬ ‭amortize‬ ‭so‬ ‭that‬ ‭the‬ ‭mortgage‬
‭will‬ ‭be‬ ‭paid‬ ‭off‬ ‭by‬ ‭the‬ ‭end‬ ‭of‬ ‭its‬
‭original term.‬
‭★‬ ‭30-year‬ ‭Fully‬ ‭Amortizing‬
‭Payment‬ ‭,‬ ‭the‬ ‭borrower‬ ‭pays‬ ‭both‬
‭principal‬‭and‬‭interest‬‭on‬‭the‬‭loan.‬‭The‬
‭payment‬ ‭is‬ ‭calculated‬ ‭each‬ ‭month‬
‭based‬ ‭on‬ ‭the‬ ‭prior‬ ‭month’s‬ ‭fully‬
‭indexed‬ ‭rate,‬ ‭loan‬ ‭balance,‬ ‭and‬
‭remaining loan term.‬

‭PAGE‬‭7‬ ‭AGA – 3AIS2 – 2024-2025‬


‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭★‬ 1‭ 5-Year‬ ‭Fully‬ ‭Amortizing‬


‭Mortgage-Backed Securities‬
‭Payment‬ ‭is‬ ‭simile‬ ‭to‬ ‭30-year‬ ‭fully‬
‭amortizing‬ ‭payment‬ ‭option‬ ‭ARM‬‭but‬
‭●‬ T ‭ hree‬ ‭Major‬ ‭types‬ ‭of‬ ‭Mortgage-Backed‬
‭with‬ ‭a‬ ‭larger‬ ‭amount‬ ‭of‬ ‭principal‬
‭Securities‬
‭paid‬ ‭each‬ ‭month.‬ ‭The‬ ‭payment‬
‭1.‬ ‭Pass-through security‬
‭amount‬ ‭may‬ ‭change‬ ‭from‬ ‭month‬ ‭to‬
‭2.‬ ‭Collateralized‬ ‭Mortgaged‬ ‭Obligation‬
‭month‬ ‭based‬ ‭on‬ ‭changes‬‭in‬‭the‬‭index‬
‭(CMO)‬
‭value‬ ‭used‬ ‭to‬ ‭determine‬ ‭the‬ ‭fully‬
‭3.‬ ‭Mortgage-backed bond‬
‭indexed rate.‬
‭●‬ ‭First‬‭two‬‭securities‬‭are‬‭securitized‬‭which‬
‭5.‬ ‭Second‬ ‭Mortgages‬ ‭-‬ ‭loans‬ ‭secured‬ ‭by‬ ‭a‬
‭means‬ ‭it‬ ‭involves‬ ‭the‬ ‭pooling‬ ‭of‬ ‭a‬ ‭group‬ ‭of‬
‭piece‬ ‭of‬ ‭real‬ ‭estate‬ ‭already‬ ‭used‬ ‭to‬ ‭secure‬ ‭a‬
‭mortgages‬ ‭with‬ ‭similar‬ ‭characteristics,‬ ‭the‬
‭first‬ ‭mortgage.‬ ‭Should‬ ‭default‬ ‭occur,‬ ‭the‬
‭removal‬ ‭in‬ ‭the‬‭BS,‬‭and‬‭the‬‭subsequent‬‭sale‬‭of‬
‭second‬‭mortgage‬‭holder‬‭is‬‭paid‬‭only‬‭after‬‭the‬
‭interests‬ ‭in‬ ‭the‬ ‭mortgage‬ ‭pool‬ ‭to‬ ‭secondary‬
‭first‬‭mortgage‬‭is‬‭paid‬‭off.‬‭As‬‭a‬‭result,‬‭interest‬
‭market investors.‬
‭rates‬ ‭on‬ ‭second‬ ‭mortgages‬ ‭are‬ ‭genrallt‬
‭●‬ ‭Securitization‬ ‭of‬ ‭mortgages‬ ‭results‬ ‭in‬ ‭the‬
‭higher on first mortgages.‬
‭creation‬ ‭of‬ ‭mortgage-backed‬ ‭securities,‬‭which‬
‭ .‬ ‭Reverse-Annuity‬
6 ‭Mortgages‬ ‭-‬ ‭a‬
‭can‬ ‭be‬ ‭traded‬ ‭in‬ ‭the‬ ‭secondary‬ ‭mortgage‬
‭mortgage‬‭borrower‬‭receives‬‭regular‬‭monthly‬
‭markets.‬
‭payments‬ ‭from‬ ‭a‬ ‭financial‬ ‭institution‬ ‭rather‬
‭1.‬ ‭Pass-Through Securities‬
‭than‬ ‭making‬ ‭them.‬ ‭When‬ ‭RAM‬ ‭matures,‬ ‭the‬
‭-‬ ‭Promised‬ ‭payments‬ ‭of‬ ‭principal‬ ‭and‬
‭borrower sells the property to retire the debt.‬
‭interest‬‭on‬‭pools‬‭of‬‭mortgages‬‭created‬
‭by‬ ‭FIs‬ ‭to‬ ‭secondary‬ ‭market‬ ‭investors‬
‭Secondary Mortgage Markets‬ ‭holding an interest in these pools.‬
‭-‬ ‭After‬ ‭a‬ ‭financial‬ ‭institution‬ ‭accepts‬
‭ hrough‬ ‭one‬ ‭of‬ ‭two‬ ‭mechanisms,‬ ‭FIs‬ ‭can‬ ‭remove‬
T ‭mortgages,‬ ‭it‬ ‭pools‬ ‭them‬ ‭and‬ ‭sells‬
‭mortgages‬ ‭from‬‭their‬‭balance‬‭sheets,‬‭placing‬‭them‬‭for‬ ‭interests‬ ‭in‬ ‭these‬ ‭pools‬ ‭to‬
‭trading in secondary mortgage markets.‬ ‭pass-through security holders.‬
‭●‬ ‭Mortgage Sales‬ ‭-‬ ‭Each‬ ‭pass-through‬ ‭mortgage‬ ‭security‬
‭●‬ ‭Mortgage-Backed Securites‬ ‭represents‬ ‭a‬ ‭fractional‬ ‭ownership‬
‭share in a mortgage pool.‬
‭Mortgage Sales‬ ‭2.‬ ‭Collateralized Mortgage Obligations‬
‭-‬ ‭A‬ ‭second‬ ‭vehicle‬ ‭for‬ ‭securitizing‬ ‭FI‬
‭●‬ O ‭ ccurs‬ ‭when‬ ‭a‬ ‭FI‬ ‭originates‬ ‭a‬ ‭mortgage‬ ‭and‬ ‭assets that is increasingly used.‬
‭sells‬ ‭it‬ ‭with‬ ‭or‬ ‭without‬‭recourse‬‭to‬‭an‬‭outside‬ ‭-‬ ‭A‬ ‭device‬ ‭for‬‭making‬‭mortgage-backed‬
‭buyer.‬ ‭securities‬ ‭more‬ ‭attractive‬ ‭to‬ ‭certain‬
‭-‬ ‭Sold‬ ‭without‬ ‭recourse‬ ‭the‬ ‭FI‬ ‭not‬ ‭types‬ ‭of‬ ‭classes‬ ‭or‬ ‭investors‬ ‭by‬
‭only‬‭removes‬‭it‬‭from‬‭its‬‭balance‬‭sheet‬ ‭repacking‬ ‭the‬ ‭cash‬ ‭flows‬ ‭from‬
‭but‬ ‭also‬ ‭has‬ ‭no‬‭explicit‬‭liability‬‭if‬‭the‬ ‭mortgages‬‭and‬‭pass-through‬‭securities‬
‭mortgage‬ ‭eventually‬ ‭goes‬ ‭bad.‬ ‭Thus‬ ‭in a different fashion.‬
‭the‬ ‭buyer‬ ‭of‬ ‭the‬ ‭mortgage‬ ‭bears‬ ‭all‬ ‭-‬ ‭A‬ ‭multiclass‬ ‭pass-through‬ ‭with‬ ‭a‬
‭the credit risk.‬ ‭number‬ ‭of‬ ‭different‬ ‭bond‬ ‭holder‬
‭-‬ ‭Sold‬ ‭with‬ ‭recourse,‬ ‭under‬ ‭certain‬ ‭classes or tranches.‬
‭conditions‬ ‭the‬ ‭buyer‬ ‭can‬ ‭return‬ ‭the‬ ‭3.‬ ‭Mortgage-Backed Bond‬
‭mortgage‬ ‭to‬ ‭the‬ ‭selling‬ ‭financial‬ ‭-‬ ‭Mortgages‬ ‭backing‬ ‭MBBs‬ ‭normally‬
‭institution.‬‭Therefore,‬‭the‬‭FI‬‭retains‬‭a‬ ‭remain on the balance sheet.‬
‭contingent credit risk liability.‬ ‭-‬ ‭It‬ ‭is‬ ‭a‬ ‭collateralization,‬‭the‬‭cash‬‭flows‬
‭●‬ ‭Major‬ ‭reason‬ ‭that‬ ‭FIs‬ ‭sell‬ ‭loans‬ ‭is‬‭to‬‭manage‬ ‭o‬ ‭the‬‭mortgages‬‭backing‬‭the‬‭bond‬‭are‬
‭their credit risk better.‬ ‭not‬ ‭necessarily‬ ‭directly‬ ‭connected‬ ‭to‬
‭●‬ ‭Allows‬ ‭FIs‬ ‭to‬ ‭achiev‬ ‭better‬ ‭asset‬ ‭interest‬‭and‬‭principal‬‭payments‬‭on‬‭the‬
‭diversification.‬ ‭MBB.‬
‭●‬ ‭Allows‬ ‭FIs‬ ‭to‬ ‭improve‬ ‭their‬ ‭liquidity‬ ‭risk‬‭and‬ ‭-‬ ‭Issued‬ ‭to‬ ‭raise‬ ‭long-term‬ ‭low-cost‬
‭interest rate risk situations.‬ ‭funds.‬

‭PAGE‬‭8‬ ‭AGA – 3AIS2 – 2024-2025‬


‭FINANCIAL MARKETS‬
‭CA51021‬ ‭1ST SEMESTER – ANTONIO ERIBERTO CABUG‬

‭Participants in the Mortgage Markets‬


1‭ .‬ ‭ anks‬
B
‭2.‬ ‭Thrifts‬
‭3.‬ ‭Savings Institutions‬
‭4.‬ ‭Mortgage Companies‬
‭5.‬ ‭Mortgage Bankers‬

‭PAGE‬‭9‬ ‭AGA – 3AIS2 – 2024-2025‬

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