• The Korean Journal of Financial Management
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• v.23 no.1
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• pp.165-191
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• 2006

I examine the relationship between values and security designs of MBS(mortgage-backed securities), using four different types of them. To this end I consider a pass-through and three different kinds of CMOs(collateralized mortgage obligations). It turns out that the pass-through has the lowest value and that, among CMOs, that of a senior-mezzanine-subordinate design has the highest value. This implies that CMOs of a simple and extreme design, like that of a senior-subordinate design, are not likely to be the best CMOs for risk averse buyers. Another critical finding is that the optimal security design of CMOs or MBS does exist in the form of an interior solution. This indicates that MBS issuers could charge higher prices of MBS given their underlying mortgages by tailoring MBS security designs to the needs or utilities of MBS buyers, usually by removing and combining risks of component tranches of MBS. Accordingly a thorough study of realistic utility functions of MBA buyers could enhance the values or prices of MBS to be issued.

• The Korean Journal of Financial Management
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• v.22 no.1
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• pp.147-179
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• 2005

It is frequently said that mortgage-backed securities (MBS) of different security designs are issued in an attempt to meet the varying needs and expectations of investors. If this is true indeed, MBS of complicated risk-return characteristics are likely to be priced higher than MBS of simple risk-return characteristics we. We test this implication by establishing a recombining binomial interest rate prepayment model with a burnout effect embedded. More specifically, we compare the relative values (utilities) of a pass-through and a PAC- Support collateralized mortgage obligation(CMO), and theoretically show why and how the CMO is more highly valued than is the pass-through. The model is established such that mortgage prepayment is a function of the current value of, and the past path of, the mort-gage market rate. Since we work on not the total value of the two MBS but the value of each tranche of either MBS, the test results could be robust to slightly different versions of similar tests, which may be done in the future.