Final answer:
GNMA pass-through certificates are quoted in terms of the percentage of their face value. These securities, backed by the Government National Mortgage Association, provide investors with monthly payments from principal and interest of underlying mortgages, and are considered high in credit quality while bearing interest rate and prepayment risks.
Step-by-step explanation:
GNMA pass-through certificates are quoted in terms of the percentage of their face value, which is similar to how other fixed-income securities are quoted. GNMA, or Government National Mortgage Association, issues securities backed by a pool of mortgages and provides guarantees for mortgage-backed securities. Investors receive monthly payments derived from the principal and interest payments made by the borrowers in the underlying mortgages.
These pass-through securities play a pivotal role in providing liquidity to the United States housing market. Investors are interested in the yield, credit risk, prepayment risk, and other factors when evaluating GNMA certificates. This type of investment allows for monthly income, which is made up of interest as well as the principal repayment.
Due to their government backing, GNMA pass-through certificates are considered to be of high credit quality. Yet, they do entail a degree of interest rate risk and prepayment risk, which must be assessed while contemplating an investment. Also, tax implications are a part of the investment's consideration, as the interest income from GNMA pass-through certificates is taxable at the federal level, but typically exempt from state and local taxes, depending on investor's location.