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Other security-specific sources of return
12.1 PAYDOWN
Amortising securities are structured so that their principal is repaid over the lifetime of the security, rather than as a single lump sum at maturity. Typically, the ratio of interest to principal is designed to change over time so that the borrower can make equal payments throughout the security’s lifetime.
Some types of amortising bonds, such as mortgage-backed securities (MBSs), passthroughs and collateralised mortgage obligations (CMOs), have the additional feature that the borrower can pay the principal back to the lender faster than scheduled. When early repayments of principal are made, such securities can generate ...
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