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CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

In a mortgage pass-through security, the monthly cash flow received by the investor is most likely composed of:

Investors in a mortgage pass-through receive the pool's interest, scheduled principal and any prepayments each month, after servicing and other fees are deducted. Principal is amortized over time rather than paid at maturity, and the cash flow varies with borrower payments rather than being a fixed coupon.

  1. Ascheduled interest only, with principal returned at maturity
  2. Binterest and principal payments from the pool, net of servicing and other fees, plus any prepaymentsCorrect
  3. Ca fixed coupon set at issuance, independent of the borrowers' payments

Explanation

A pass-through passes borrowers' monthly interest, scheduled principal and prepayments to investors after deducting servicing and guarantee fees. Principal is not deferred to maturity, and the payments depend on the pool's actual cash flows, not a fixed coupon.

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