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The Government National Mortgage Association (Ginnie Mae) is a government-owned agency that buys mortgages from lending institutions, turns them into securities, and then sells those securities to investors. Because the payments to investors are guaranteed by the full faith and credit of the U.S. Government, they return slightly less interest than other mortgage-backed securities.
Collateralized mortgage obligations (CMOs) are backed by mortgage-backed securities with a fixedmaturity. They can eliminate the risks associated with prepayment because each security is divided into maturity classes that are paid off in order. As a result, they yield less than other mortgage-backed securities. The maturity classes are called tranches, and they are differentiated by the type of return. A given tranch may receive interest, principal, or a combination of the two, and may include more complexstipulations.
One negative aspect of CMOs is the lower interest rates that compensate for the reduction in prepayment risk and increased predictability of payments. Also, CMOs can be quite illiquid, which can increase the cost of buying and selling them.
Brady Bonds
Brady bonds arose from an effort in the 1980s to reduce the debt held by less-developed countries that were frequently defaulting
on loans. The bonds are named for TreasurySecretary Nicholas Brady, who helped internationalmonetary organizations institute the program of debt-reduction. Defaulted loans were converted into bonds with U.S. zero-coupon Treasury bonds as collateral. Because the Brady bonds were backed by zero-coupon bonds, repayment of principal was insured. The Brady bonds themselves are coupon-bearing bonds with a variety of rateoptions (fixed, variable, step, etc.) with maturities of between 10 and 30 years. Issued at par or at a discount, Brady bonds often include warrants for raw materials available in the country of origin or other options.
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