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Valuing Agricultural Mortgage-Backed Securities

Published online by Cambridge University Press:  12 June 2017

Jeffrey R. Stokes  and
Brian M. Brinch
Jeffrey R. Stokes
Affiliation:
Pennsylvania State University, University Park, PA
Brian M. Brinch
Affiliation:
Federal Agricultural Mortgage Corporation in Washington, DC
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Abstract

A model to value Federal Agricultural Mortgage Corporation (Farmer Mac) agricultural mortgage-backed securities (AMBS) is developed and numerically solved. The results suggest prepayment penalties currently being used by Farmer Mac reduce yields on AMBS considerably. Even with prepayment penalties, it can be advantageous for profit maximizing mortgagors to optimally prepay or even default on agricultural mortgages. The model is used to quantify prepayment and default risk by valuing the embedded options in the mortgages. Monte Carlo simulation is also used to determine the probability of optimal prepayment given the term structure assumption used to develop the model.

Keywords

agricultural mortgage-backed securitiesdefaultdynamic programmingsimulationprepaymentG13G21
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 33 , Issue 3 , December 2001 , pp. 493 - 511
Copyright
Copyright © Southern Agricultural Economics Association 2001

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