Bridge over ocean
1 January 1992 Financial Analysts Journal Volume 48, Issue 1

The Evolution of Mortgage Yield Concepts

  1. Jack M. Guttentag

The concept of mortgage yield has evolved from the yield to prepayment, which held sway until the mid1970s, to the cash-flow yield, which dominated until the late 1980s, to the option-adjusted yield, which is dominant today in some circles. Each of these measures represents an improvement over the one that preceded it. The cashflow yield, however, should have given way to the holding-period yield and then to the option-adjusted holding-period yield. The option-adjusted yield is merely a special case of the latter measure.

The holding-period yield, expressed in schedule form, is the ideal tool for scenario analysis because it is sensitive to the particular circumstances of the user. Furthermore, the option adjusted holding-period yield provides a better indication of whether a security is correctly priced, because it does not assume the market's consensus holding period.

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