NHA Mortgage-Backed Prepayable MBS are composed of ...

1 NHA mortgage -BackedSecuritiesIf you are looking for an alternativefixed income investment thatcombines attractive yields with the security ofa government guarantee and the convenienceof monthly income, consider NHA Mortgage-Backed Securities (MBS).What are Mortgage-Backed Securities?NHA Mortgage-Backed Securities are investments thatrepresent ownership in the cash flows from a group ofgovernment-insured, residential mortgages. The term NHA refers to the National Housing Act, the federallegislation that provides for the offering of security is backed by a distinct group of mortgages,known as a pool.

2 Investors in an NHA MBS pool receive ablended monthly payment consisting of any principal thatis paid by the underlying mortgagors and an interestcomponent that is based on the pool s coupon BenefitsUNSURPASSED SAFETYNHA Mortgage-Backed Securities are considered AAAinstruments as the timely payment of both principal andinterest is guaranteed by the Canada mortgage andHousing Corporation (CMHC), a federal crowncorporation. Thus, NHA MBS are equivalent toGovernment of Canada Bonds in terms of YIELDSA lthough NHA MBS offer the same safety of principal,they typically provide an annualized yield that is higherthan that of equivalent term Treasury Bills or Governmentof Canada ELIGIBILITYMBS are fully eligible for investment in taxsheltered plans such as RRSPs and INCOMEEach month, principal and interest payments flow frommortgages to investors.

3 Thus, NHA MBS are ideal forinvestors who desire regular monthly income, especiallythose looking for suitable RRIF Mortgage-Backed Securities trade in a fashionsimilar to government bonds. Since inception, the NHAMBS market has grown considerably, both in size and inthe number of market participants. Since CIBC WorldMarkets MBS Trading Desk bids on all outstanding NHAMBS issues, you can always sell your investments beforematurity if Features of Mortgage-Backed SecuritiesThere are two basic types of NHA MBS:non- Prepayable pools and Prepayable MBSNon- Prepayable pools are the most basic form of NHAMBS.

4 In a non- Prepayable pool, unscheduled principalpayments are not permitted. Thus, principal on theunderlying mortgages in a non- Prepayable pool can onlybe repaid according to the original amortization pools are often referred to as closed pools as theyare closed to monthly cash flow from a closed pool consists of asmall principal portion and a larger interest component. Asprepayments are not permitted, monthly payments arepredictable and consistent in size over the life of the a result, non- Prepayable MBS are suitable for investorswho require a predictable monthly cash flow.

5 At maturity,any principal that has not been repaid over the life of thepool is then returned to the MBSP repayable MBS are composed of mortgagesthat allow mortgage holders to make unscheduledprincipal payments under certain conditions. Inaddition to scheduled principal and interest,investors holding Prepayable MBS may alsoreceive unscheduled principal and, in some cases, thepenalty interest charged to mortgagors who make earlyprepayments. Prepayable pools are often called openpools as they are open to early principal potential for prepayments can cause the cash flowsfrom Prepayable pools to vary on a monthly the original principal is guaranteed by the federalgovernment, the timing of principal payments is somewhatuncertain.

6 Prepayable MBS are better suited for investorslooking for yield enhancement because they arecompensated for the variability in cash flow by yields thatare higher than on comparable non- Prepayable Numbers and RPB FactorsIndividual MBS pools are identified by a unique eight digitnumber known as a pool number. The first three digits of apool number give an indication as to the pool type of agiven issue. Pool numbers beginning with 990 and 966are given to non- Prepayable pools while pool numbersbeginning with 967 and 964 indicate Prepayable order to keep track of the principal that has beenreturned for individual pools, a statistic known as the RPBfactor is used (RPB is short for Remaining PrincipalBalance).

7 The RPB factor is an eight digit decimal numberthat indicates the amount of original principal remaining forthe mortgage pool after the current months an example, consider an MBS with a pool factor For every $10,000 of original principal,approximately $9,835 remains outstanding and $165 hasbeen repaid. The RPB factor is often referred to as thepool factor (not to be confused with the pool number whichis used to identify specific pools). Answers to Commonly Asked QuestionsWHEN DO I RECEIVE MBS payments ?The payment date for NHA MBS is the 15th of the are made on the 15th for any and all principaland interest due at the end of the previous month.

8 If the14th or 15th fall on a non-business day, payment will bemade the second business day following the 14th. Thispayment date is also used for any balloon payment ofprincipal due at TERMS ARE AVAILABLE?Although most NHA MBS are issued in termsof 3 or 5 years, some pools are issued with termsof 10 years or longer. The large number of issuesoutstanding also provides for an active secondary marketthat offers a variety of terms, coupons and ARE THE TAX IMPLICATIONSOF INVESTING IN MBS?Monthly payments from MBS are comprised of bothinterest and principal.

9 As per the CMHC MBS InformationCirculars, Canadian residents are taxed (as income) ononly the interest portion of their payment. Capital gains arerealized at disposition or maturity and will be taxed undernormal capital gains I OBTAIN PHYSICAL CERTIFICATESFOR MY MBS INVESTMENT?All NHA MBS are available on the book based system,which means there is no need for physical delivery. If yourequire physical delivery, MBS certificates can be issuedin certificate THERE A MINIMUM SIZE FOR ANMBS INVESTMENT?NHA MBS are available for minimum face value amountsof $5,000 and in $5,000 multiples a Wood Gundy PCI FinancialConsultant today!

10 He or shewill be pleased to demonstrate howNHA MBS can improve yourfixed income DisclaimerApril, 1999 This report is issued by (i) in Canada, CIBC World Markets Inc., a member of the IDAand CIPF, (ii) in the US, CIBC World Markets Corp., a member of the NYSE and SIPC,and (iii) in the UK, CIBC World Markets plc, each which is regulated by the SFA. Anyquestions should be directed to your sales province in Canada, state in the US, and most countries throughout the world have their ownlaws regulating the types of securities and other investment products which may be offered to theirresidents, as well as the process for doing so.