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Also known as a cash flow yield, a mortgage yield is the amount of returns that are generated from a set of mortgage-backed securities, such as mortgage-backed bond issues. One of the benefits of calculating this type of yield is to determine if the anticipated return from the mortgage-backed security compares favorably with other types of bond issues, allowing investors to decide if those securities are worth the time and resources necessary to acquire the investment. Typically, the mortgage yield is calculated as a monthly rate, although it is possible to project the yield for a longer period of time.
The basic process for calculating the mortgage yield associated with a mortgage-backed bond requires making a few assumptions on the front end. This includes making the assumption that the payments on those mortgages will occur according to the schedule outlined in the mortgage terms and conditions, which usually require monthly installment payments. From there, it is possible to identify the portion of those payments that have to do with both the balance owed on the principal of the loan and the portion that is used to settle the interest due on that mortgage loan. By relating this data to how quickly the mortgage pool of assets is expected to be paid in full, it is possible to determine the discount rate for the securities and see if the monthly mortgage yield is in line with the actual return earned by the mortgage holder.
Identifying the mortgage yield associated with mortgage-backed bonds is very helpful in terms of comparing the potential of the investment with other options. This includes comparing the return or yield with other types of bond issues, and determining if the mortgage yield is sufficient to merit the investment. This type of assessment often helps to provide perspective in terms of what could be earned from using that same amount of resources to purchase a different set of mortgage-backed bonds or other types of bond issues.
Investors make use of the mortgage yield as one of the more important ways to evaluate the feasibility of purchasing a pool of mortgage-backed securities. Along with assessing the amount of return or yield they can reasonably expect, investors can also look to the nature of the securities themselves and decide if the level of risk involved is reasonable in comparison to that anticipated yield. Should the investors feel that the return is not sufficient when compared to the level of risk, they can choose to invest in other types of bond issues or even other types of securities.