DEFINITION of 'Current Coupon'
The to-be-announced (TBA) mortgage security of any issue for the current delivery month that is trading closest to, but not exceeding par value. TBA mortgage securities with the current coupon are used as a benchmark throughout the industry to price and value mortgages.
BREAKING DOWN 'Current Coupon'
For example, TBA mortgage securities often trade with interest rates in increments of 0.5%. Therefore, assuming par value is 100, if Fannie Mae 8% mortgage securities are trading at 99.5 and Fannie Mae 8.5% mortgage securities are trading at 100.75, Fannie Mae's 8% security would be the current coupon.
A principle of mortgage analysis is that the higher a mortgage-backed security's coupon is relative to the current coupon, the more likely that mortgage-backed security is to prepay. Mortgage investors make this relative value analysis in calculating mortgage-backed security yields and valuations.