What are Pass-Through Securities?
Pass-through securities are one of the widely used financial instruments. Several mortgages may form the pool for a mortgage pass-through security, and different types of mortgages can be used in this securities mortgage. These securitised are then passed through to another party willing to make payments against it. The pass-through security investors receive the monthly cash flows generated by the underlying pool of mortgages, less any servicing and guarantee/insurance fees.
Why are Pass-Through Securities important?
The most crucial characteristic of pass-through securities is their prepayment risk; because the mortgages used as collateral for the pass-through can be prepaid, the pass-throughs themselves have significant prepayment risk. Hence, investors should know about this product to manage their risk well.