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Thursday, May 05, 2016 1:51:47 PM
I do ask first - why do you say this (below)
That's the MBS bonds Fannie has issued whose rates (payouts to bond buying customers) are pegged to the prime rate, Treasuries,
I ask as I used to own some FNMA paper (I think) in IRAs. What I bought was an interest in a pool of mortgages.
There was an assumed (formula derived estimated) interest rate based on expectations of cash flow from interest and principal payments to FNMA and out to me. There was an assumed (formula derived estimated) duration or length of time the bond would be in my hands.
As people paid interest that was simple and I thought all very much based on 30 year fixed mortgage rate paper.
As people paid principal - in a steady stream or in lumps - such "payment or such advance or pre payment" of principal flowed through to me as a holder and reduced the amount of principal I held (and should not be viewed as extra interest)
As interest rates went down (down in the market for new mortgages) - there would be an acceleration of the timing and amount of refinancing activity. With more than expected refinancing of the mortgages underlying the paper I bought and owned - more principal would flow faster to me and the "stub" I owned would shrink faster than the original steady state estimate.
Never seemed to me there was any index or linking of the interest I received as the underlying mortgages were a pool of 15 or 30 year FIXED interest rate mortgages and the interest I received came from the interest they paid - again fixed.
FNMA took the default risk and I took various risks - including faster prepayment of the principal during LOW interest rate times (not good). That risk - re investment risk - drove me from such bonds (or non bonds). But I do not remember being indexed on the interest payments.
What do I have wrong that I think they were fixed and not floating as you noted?
(I still need to think about F and F buying reinsurance of the amounts involved etc.)
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