Cross Calling

DEFINITION of 'Cross Calling'

A method of redeeming bonds using surplus funds provided from an unrelated bond issue. Cross calling occurs when a lender, which repackages its loans into new securities, uses prepayments from low interest rate loans to repay principal on the high-yield securities.

BREAKING DOWN 'Cross Calling'

The practice of cross-calling is seen in the mortgage-backed securities (MBS) market. However, it is seen as taboo because it shifts risk from high-yield investors to low-yield ones.

For example, let's examine a simple bank that has issued two mortgages with interest rates of 5% and 10%. The bank converts these into mortgage-backed securities and sells them to investors with coupon rates of 7% and 15%, respectively. Cross calling involves using prepayments from the 5% mortgage to pay principal on the 15% MBS. While this pays off the more risky bond faster, it forces the 7% bondholders to rely on risky payments from the 10% mortgage. The 7% bondholders are not compensated for the additional risk and the bank saves by making smaller interest payments.

RELATED TERMS
  1. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  2. Single Monthly Mortality - SMM

    In mortgage-backed securities (MBSs), this is the percentage ...
  3. Principal Only Strips - PO

    A type of fixed-income security where the holder is only entitled ...
  4. Amortizing Security

    A class of debt security in which a portion of the underlying ...
  5. Burnout

    A period of slowing mortgage prepayment within a mortgage backed ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
Related Articles
  1. Managing Wealth

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  2. ETFs & Mutual Funds

    The ABCs of Mortgage-Backed Securities ETFs

    ETFs focused on mortgage-backed securities, or MBS, offer an opportunity to further diversify the fixed-income portion of your portfolio.
  3. Investing

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  4. Managing Wealth

    High-Yield Corporate Bonds: Issuers and Investors

    High-yield bonds play a significant role in various investment portfolios. An examination of the issuers' and investors' side is vital.
  5. Managing Wealth

    Are High-Yield Bonds Too Risky?

    Despite their reputation, the debt securities known as "junk bonds" may actually reduce risk in your portfolio.
  6. Markets

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  7. Personal Finance

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  8. Managing Wealth

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  9. Personal Finance

    Interest-Only Mortgages: Home Free Or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  10. ETFs & Mutual Funds

    3 Mutual Funds to Profit Off Increased Mortgage Rates (PTRIX, FMSFX)

    Learn why mutual funds that invest in mortgage-backed securities (MBS) are worth a look for investors wanting to capitalize on rising mortgage interest rates.
RELATED FAQS
  1. In the context of a bond, what does the principal refer to?

    Get introduced to the world of bond investing and learn what the term "principal" means in reference to a corporate or government ... Read Answer >>
  2. What are the best ways to invest in mortgage-backed securities (MBS)?

    Find out how you can start investing in real estate through mortgage-backed securities. Read Answer >>
  3. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  4. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  5. Why do MBS (mortgage-backed securities) still exist if they created so much trouble ...

    Read several different arguments in favor of allowing the trade of mortgage-backed securities, even after the financial crisis ... Read Answer >>
  6. Why has the market for high yield bonds grown so much?

    Discover information on the high-yield bond market and learn the reasons why this investment market has grown so rapidly ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center