Hey guys (accidently posted this in Level I FYI), I’m reviewing some concepts of Mgt Passthroughs. My book brought up an interesting question of why would mortgage pass-through securities sell at higher yields than straight bonds issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association who are issuers/guarantors of mortgage passthrough securities? The only thing I can think of is a difference of credit risk, but that seems too obvious. Any ideas?
Prepayment risk. Uncertain cash flows…unknown duration. More uncertainty= more yield to attract investors (usually). That would be my guess.