In
finance, mortgage yield is a measure of
yield of
mortgage-backed bonds. It is also known as cash flow yield. The mortgage yield, or cash flow yield, of a mortgage-backed bond is the monthly compounded
discount rate at which
net present value
The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount ...
of all future cash flows from the bond will be equal to the present price of the bond.
[Choudhry, Moorad. ''Capital Market Instruments: Analysis and Valuation'', (FT Press, 2002), p. 208.]
Formula
When the coupon payments are made on a monthly basis, the mortgage yield can be calculated as:
:
Where
:''t'' - the time of the cash flow
:''n'' - each instance of coupon payment
:''r'' - the discount rate
:
- the net cash flow (the amount of cash) at time t.
Application
Mortgage yields are primarily a tool for comparing mortgage bonds with conventional bonds. The difference between the mortgage-backed bond's yield (generally converted to semi-annually compounded
yield to maturity
The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is an estimate of the total rate of return anticipated to be earned by an investor who buys a bond at a given market price, h ...
) and a conventional bond is called the "yield spread" or "
I-spread
The Interpolated Spread or I-spread or ISPRD of a bond is the difference between its yield to maturity and the linearly interpolated yield for the same maturity on an appropriate reference yield curve. The reference curve may refer to government ...
."
References
Structured finance
Fixed income analysis
Bond valuation
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