Valuation of GNMA Mortgage-Backed Securities


  • This paper has benefited from helpful comments by J. Ang, M. Brennan, P. Hendershott, R. Johnson, W. Kracaw, M. Long, G. Schlarbaum, C. Spratt, R. Thompson, and Eduardo Schwartz. We are especially grateful to J. Ingersoll, S. Richard, and G. Wright for many helpful discussions and suggestions.


GNMA mortgage-backed pass-through securities are supported by pools of amortizing, callable loans. Additionally, mortgagors often prepay their loans when the market interest rate is above the coupon rate of their loans. This paper develops a model for pricing GNMA securities and uses it to examine the impact of the amortization, call, and prepayment features on the prices, risks and expected returns of GNMA's. The amortization and prepayment features each have a positive effect on price, while the call feature has a negative impact. All three features reduce a GNMA security's interest rate risk and, consequently, its expected return.