(See "How Do I Select The Best of Its Type" for an explanation of quoted and realized yields.)
Conversely, realized yields will be higher than quoted yields if actual prepayments are slower than assumed prepayments.
Realized yields will be greater than quoted yields if actual prepayments are faster than assumed prepayments.
This shortens the effective maturity of the REMIC bonds and raises the realized yield over the quoted yield.
The quoted yield will not accurately reflect an investor's potential realized yield unless actual prepayments equal assumed prepayments.
The averages of the ex post or realized yields on dedicated portfolios and the ex post rates of growth in wages were approximately the same.
Adjustments estimated below are affected by how, on balance, interest rate shifts impact the realized yield on dedicated portfolios.
[Mathematical Expression Omitted] where r' = realized yield on dedicated portfolios during period between t = 0 and t = k; g' = realized rate of wages growth during period between t = 0 and t=k; (r'-g'), k = realized differential; (r'-g')t=o = contemporaneous differential;7 X' = coefficient of adjustment for dedicated portfolios; and k length of period.
Conversely, realized yields on mortgage-backed securities purchased for premiums will be higher than quoted yields if actual prepayments are slower than assumed.
Rapid payoffs will reduce their realized yield. This occurs because investors are unlikely to fully amortize (i.e., recover) the premium before the bonds are repaid.
(The $100 coupon less the $17.59 loss in value on the bond divided by the original investment of $1,017.59 equals 8.1%.) Consequently, the realized yield when principal is prepaid after year one (rather than after year two as assumed when computing the quoted yield) is less than the quoted yield of 9%.
If the $1,000 face value of the bond is prepaid at the end of the first year, the realized yield is 9.93%.