Bond Question > Business & Investing

Posted: 10/16/2008 10:30:32 AM EDT

Why do bonds backed by mortgages typically fall in price when interest rates decline? Is this because it is easier for the home owner to make their payment which makes the bond less risky?

Posted: 10/21/2008 6:38:42 PM EDT

[#1]

Because the homeowner can refi the debt away, and thus the bond is less attractive as an investment.

Posted: 10/21/2008 6:46:53 PM EDT

[#2]

Quoted:
Because the homeowner can refi the debt away, and thus the bond is less attractive as an investment.

So basically it's just reinvestment risk?

Posted: 10/22/2008 3:39:58 AM EDT

[#3]

Quoted:
Why do bonds backed by mortgages typically fall in price when interest rates decline? Is this because it is easier for the home owner to make their payment which makes the bond less risky?

Bonds backed by mtgs are why we are where we are right now. They're known as CDOs(Collateralized Debt Obligations=RE loans)They were repackaged in derivitives in tiny amounts as secured debt and sold as FixedIncome securities but were really ARMs that as we see now werent as secure as they were said to be because the mtgs rates were not FIXED and therefore alot of defaults. Thats my understanding. The only bonds I know about are TBM. I hope this helps although it does not target your question. Good Luck!

Posted: 10/22/2008 6:30:39 AM EDT

[#4]

Quoted:

Quoted:
Why do bonds backed by mortgages typically fall in price when interest rates decline? Is this because it is easier for the home owner to make their payment which makes the bond less risky?

Bonds backed by mtgs are why we are where we are right now. They're known as CDOs(Collateralized Debt Obligations=RE loans)They were repackaged in derivitives in tiny amounts as secured debt and sold as FixedIncome securities but were really ARMs that as we see now werent as secure as they were said to be because the mtgs rates were not FIXED and therefore alot of defaults. Thats my understanding. The only bonds I know about are TBM. I hope this helps although it does not target your question. Good Luck!

I'm very familiar with CDO's. Just not with bonds in general. Thanks for the input.

Posted: 10/22/2008 8:14:35 AM EDT

[#5]

one aspect i'm aware of is that home owners often refinance when rates decline and mortgages that were used to back the bond are often payed off early - with less than the interest originally expected when calculating bond price. so the bond is worth less and buyers expect to pay less.

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