Practitioner course in fixed income
Mortgage-Backed Securities
How mortgage-backed securities work and how they are valued: the mortgage pool and its cash flows, prepayment and its models, option-adjusted spread, structured CMO tranches, and what the 2008 crisis showed about all of these.
Mortgage-backed securities turn home loans into bonds. The US agency market alone is worth trillions of dollars and trades daily, and private-label mortgage bonds were at the centre of the 2008 crisis. This course explains how the securities are built, why their cash flows are uncertain, and how desks value and hedge them.
Why is prepayment the central problem?
A homeowner can repay the loan at any time, and usually does so when rates fall and refinancing is cheap. That leaves the investor holding cash just when reinvestment rates are low, and holding a longer bond just when rates have risen. Modelling that behaviour, and pricing the option it creates, is the core skill the course teaches.
How is the course taught?
Audio lessons cover the general subject, explainer films show pools paying down under different rate paths, and the workbooks hold worked cash-flow tables, simulation notebooks and cheat sheets of market conventions. The valuation lab receives written feedback from the faculty.
Who is this course for?
Quants and analysts heading for fixed income, structured credit or risk roles. It counts toward the Certificate in Quantitative Risk Management and so toward the Fellowship in Computational Finance.
What you will be able to do
- Project the cash flows of a mortgage pool under different prepayment speeds.
- Explain negative convexity and measure effective duration and convexity of an MBS.
- Compute an option-adjusted spread with a simple rate simulation.
- Describe how CMO tranches redistribute prepayment and credit risk, and where that failed in 2008.
Syllabus, module by module
The mortgage and the pool
Amortisation, servicing, agency guarantees and the pass-through security.
Prepayment
CPR, PSA, refinancing incentives, burnout and turnover.
Negative convexity
Why MBS lose when rates move either way, and effective duration.
Option-adjusted spread
Monte Carlo of rate paths, cash flows along each path and the OAS calculation.
Structured products
CMOs, sequential and PAC tranches, interest-only and principal-only strips.
Credit and 2008
Private-label MBS, subordination, ratings and how correlated defaults broke the structures.
How the certificate is earned
Graded problem sets and a final lab: value an agency pass-through by simulation and report its option-adjusted spread and effective duration. On a pass you receive the Course certificate in Mortgage-Backed Securities, issued by the Institute with a verification code. Read how certification works.
Before you start
Bond pricing, duration and the yield curve.
This course counts toward
- Certificate in Quantitative Risk ManagementA financial risk management certification in one semester of eleven courses and a capstone on measuring and governing market and credit risk: VaR and expected shortfall, volatility models, stress tests, credit and counterparty risk, bank capital and the validation of the models themselves.
- Fellowship in Computational FinanceThe top credential on the researcher path. Four semesters, 38 courses, and a dissertation supervised in writing and examined by two faculty members.
Questions applicants ask
What is a mortgage-backed security?
It is a bond whose payments come from a pool of home loans. Investors receive the borrowers’ interest and principal, including early repayments, which is why the timing of MBS cash flows is uncertain.
Why are mortgage-backed securities hard to value?
Because homeowners can repay early, usually when rates fall. The investor has in effect sold an option, so valuation needs a model of rates and of borrower behaviour, not just a discount curve.