OUR BUSINESS

Strategy

Investment Strategy

Our principal goal is to preserve our book value while generating net income for distribution to our stockholders through regular quarterly dividends from our net interest income, which is the spread between the interest income earned on our interest earning assets and the interest costs of our borrowings and hedging activities.

Our investment strategy is designed to:

• Build an investment portfolio consisting exclusively of agency securities that seeks to generate attractive risk-adjusted returns
• Capitalize on discrepancies in the relative valuations in the agency securities market
• Manage financing, interest and prepayment rate risks
• Provide regular quarterly distributions to our stockholders
• Qualify as a REIT
• Remain exempt from the requirements of the Investment Company Act of 1940, as amended ("Investment Company Act")

We employ the expertise and experience of American Capital's RMBS investment team to build an investment portfolio consisting exclusively of agency securities that incorporates our understanding and outlook of the RMBS market. We seek to capitalize on changes in the prepayment and interest rate environment both currently, due to disruptions throughout the mortgage market, and going forward as future trends emerge.

Our investment philosophy is based on, what we feel are, the fundamentals of MBS investing: Asset Selection, Risk Management and Funding/Leverage.

Financing Strategy

As part of our investment strategy, we borrow against our investment portfolio using repurchase agreements. Our borrowings generally have maturities that range from 30 to 90 days, but may have maturities up to 364 days. We expect our leverage will range between five to 10 times the amount of our stockholder's equity (calculated in accordance with GAAP). Our investment guidelines limit our leverage to 10 times our stockholders' equity.

Hedging Strategy

As part of our risk management strategy, we hedge our exposure to interest rate and prepayment risk given our investment strategy, the cost of the hedging transactions and our intention to qualify as a REIT. We design an interest rate risk management program consistent with our outlook for the market to minimize the impact of changes in interest rates on our investment portfolio and related borrowings. We may enter into interest rate caps, collars, floors, forward contracts, options, futures or swap agreements to attempt to mitigate the risk of the cost of our variable rate liabilities increasing at a faster rate than the earnings on our assets during a period of rising interest rates.

Option Strategy

As a means of enhancing our returns and managing the risks associated with our portfolio of agency securities, we may purchase TBA securities or buy and sell put or call options on TBA securities. This strategy is implemented based upon overall market conditions, the level of volatility in the mortgage market, size of our agency securities portfolio, notional value of our swap positions outstanding and our intention to qualify as a REIT. As a result, the notional value of our options contracts outstanding at any one time is less than the size of our agency securities portfolio.

Investment Committee

The investment committee of our Manager consists of Malon Wilkus, John R. Erickson, Samuel A. Flax and Thomas A. McHale, each of whom is affiliated with American Capital. The investment committee meets monthly to discuss diversification of our investment portfolio, hedging and financing strategies and compliance with the investment guidelines.