1 / 10

Mortgage Price Volatility

Mortgage Price Volatility. Review of the Price-Yield Relationship An increase (decrease) in the required yield… Price Volatility Characteristics of Mortgages. Determinants of Price Volatility. Characteristics of a Mortgage that Affect Its Price Volatility Coupon Rate Term to Maturity

ramya
Download Presentation

Mortgage Price Volatility

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Mortgage Price Volatility • Review of the Price-Yield Relationship • An increase (decrease) in the required yield… • Price Volatility Characteristics of Mortgages

  2. Determinants of Price Volatility • Characteristics of a Mortgage that Affect Its Price Volatility • Coupon Rate • Term to Maturity • Yield-to-Maturity

  3. Measuring Mortgage Price Volatility • Price Value of a Basis Point • Note: Mortgage Yield Ticks Usually Equal 1/8th of 1%

  4. Duration • Definition - • Derivation:

  5. Calculating Duration • Ex. Consider a $100,000, 6% APR mortgage with 10 years to maturity and an initial yield of 8.0%. What is this mortgage’s duration?

  6. Alternative Duration Derivation • Rewrite the price of a mortgage as the present value of an annuity: • Differentiate with respect to the required yield: • Modified Duration =

  7. Now What??? • Approximate % Change in Price: • Actual % Change in Price: • Conclusions:

  8. Duration Illustrated • Duration attempts to measure… • Conclusions: Price Yield

  9. Approximating Duration • Approximating a Mortgage’s Duration • Example: What is the approximate duration for our 10 year, 6% APR, $100,000 mortgage with 10 years remaining until maturity and an initial yield of 8.0%?

  10. What About Embedded Options???

More Related