Why is contingent claims a risk when the vignette says the bond is non-callable?
The bonds could be putable or a sinking fund provision
This is a silly question. In the bond market, a bond is either callable or non-callable, right? MBS is a bond. Is MBS a callable or non-callable?
This is also related to “bullet bond” that we discussed a while ago. Are the non-callable bonds those bonds which are not callable bonds? In other words, they can be the bonds with embedded contingent claim provision? I looked at AF, and this Q has been asked since 2008. I agree with mik82.
contingent claim is when the loan is return to the issuer during a low interest market…can happen with mbs or a puttable bond
Then, you agree MBS is a non-callable bond?
mbs is really puttable not callable …call would give the issuer option to call bond and pay holder…puttable means holder can refinance at any time
MBS shall be callable rather than putable, the borrower (homeowner) has a right to refinance when I/R decreses just as a bond issuer of a callable bond is the borrower, not the lender.
hmmmmm yes AMA you are correct ( i like how u put it in simple terms i could understand :-p) i got mixed up on who was the borrower and the lender…the homeowner is the bond issuer here ( borrower) so yes the MBS is callable…
The prepayment right of borrower is similar to a call right, although not exactly same. MBS holders are the lenders.
Btw, this question has been discussed since inception, or at least since 2008. I will move on.
inception great movie from the mind of nolan