Cash Flow Yield
Cash flow yield is similar to the yield to maturity, but it applies to mortgage-backed securities. In a mortgage-backed security, mortgage payments constitute the cash flow. So the cash flow yield is the interest rate that a security must offer in order to make its market price equal to the present value of its projected cash flows.
However, when interest rates fall, homeowners often pay off their mortgages early to refinance at a lower rate. For this reason, the cash flow of a mortgage-backed security is not fixed, which is to say, it is always changing.
The rate at which homeowners prepay their mortgages is called the prepayment rate. This rate is estimated based on market data, and it is then used to calculate the cash flow yield of a mortgage-based security, which is then used to calculate the price of the security.
For bonds held to maturit