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« Avoiding a Recession Without the Bailout Bill | Main | Will the New Bailout Plan Work? A Skeptical View »

September 30, 2008



Extremely helpful for a classroom discussion. Thanks.


With the graphs, it's simple to understand. Thanks for the info.


Really useful, thanks.

And if you feel like taking it to the next step with a little more detail, that would be even better!

M M Joshi

it is good, but you have not stated why the tranches are sold and whether they are sold at a higher price. here the simplicity of the flow breaks for the barber's understanding. pls continue from the " each tranche can be sold individually ..."

tom mclaughlin

agree with MM Joshi. If the first year of payments are sold separately then a buyer of years 2thru 30 doesn't get year one and the interest on it. So what is the appeal to the pension funds, etc since, it would seem all that has happened is to increase the risk of default or prepayment??

Bill Conerly

For Joshi and Tom, here's some elaboration.

The earlier tranches have shorter maturity and less risk; both of these result in low interest rates. The buyers of these tranches will receive interest at a rate lower than the overall mortgage rate.

The later tranches will pay progressively higher interest rates, for reasons of both risk and maturity. In addition, the later tranches need higher interest rates because the buyers expect refinancings to work against them. If interest rates fall, the homeowners will refinance and the investors suddenly have to reinvest their money at low rates. If, however, interest rates rise, then the investors are locked into their investment at just the time when they'd like to jump onto another, higher rate investment.

So why be an investor in the later tranches? The return seemed to compensate for the risk. Remember that most of the deals were closed before foreclosures became a significant problem, so risk seemed low.

The higher tranches also have the advantage of no cash flow early on. See my last two paragraphs of explanation for Mrs. B.

D. Sean

Dr. Conerly,

This is a wonderful explanation. Up to this point I hadn't even attempted to understand mortgage-backed securities, but this article makes it easy. We can only hope that as more people understand what they are, we can find a way out of this financial mess we are in.


Thank you for making it simple and easy to understand


i was having a hard time to understand what it is.. your explanation made me understand clearly. Thank you

Huda El-Akkad

This is an amazing example,
thank u very much


This is a very gud example. Can u elaborate on the process please.



you literally just helped me understand 50% of my university assignment. No other resource on the internet can simply it this well.. Thanks!

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