Gross Coupon

What Is a Gross Coupon?

The term "gross coupon" alludes to the average coupon rate received from a portfolio of mortgage loans. The term is much of the time utilized in the market for mortgage-backed securities (MBS) since these mortgage portfolios are the underlying assets on which these MBS products are based.

How Gross Coupons Work

The gross coupon associated with a portfolio of mortgages is calculated by averaging all of the coupon rates from the individual mortgages that make up a MBS. A gross coupon of 5% would thusly mean that, on average, the mortgages contained in the MBS have a interest rate of 5%. Not at all like the weighted average coupon, which considers the various sizes of the mortgages while making this calculation, the gross coupon is just an average of every one of the underlying mortgages' interest rates.

Regularly, a financial institution will make a MBS by first purchasing a portfolio of mortgages from a bank and afterward packaging them into a MBS which it then, at that point, offers to investors. In that cycle, the company making the MBS will add its own layer of administration and service fees. These fees are deducted from the gross coupon to deliver a net coupon, which is hence consistently lower than the initial gross coupon.

At the point when an investor purchases a MBS, the yield that they receive depends on the net coupon. All the more explicitly, the return earned by the MBS investor depends on the regularly scheduled payments made by the homeowners on their mortgages, plus any prepayments made by those homeowners, minus the servicing costs charged by the company that packaged and sold the MBS. Since homeowners pay their mortgages every month, the returns earned by MBS investors are likewise paid out month to month.

Certifiable Example of a Gross Coupon

Dorothy is looking for fixed-income investments that she can use to upgrade the yield on her retirement savings. She has chosen to invest $100,000 of her retirement savings into MBS, as she accepts these instruments will offer a higher average yield than conventional debt securities.

In exploring these investments, Dorothy finds several mortgage-backed securities offering a gross coupon of 6%. She comprehends that this rate depends on the average interest rate charged on the mortgage-backed securities' underlying pool of mortgages, before considering the different fees charged by the firm dealing with the MBS. On the other hand, the weighted average coupon mirrors the relative size of the various mortgages inside the portfolio.

Features

• Dissimilar to the weighted average coupon, which considers the various sizes of the mortgages while making this calculation, the gross coupon is basically an average of every one of the underlying mortgages' interest rates.
• The gross coupon alludes to the average interest rate of a portfolio of mortgage loans, used to evaluate the relative yield of various mortgage-backed security products.
• The financial institution selling the mortgage-backed securities commonly deducts administrative fees from the gross coupon to create a net coupon, which is hence consistently lower than the initial gross coupon.