This chapter develops an algorithm for simulating the values of callable mortgage bonds. Since pool factors are incorporated into the prepayment model, the valuation of callable mortgage bonds becomes a path-dependent problem, and simulation is often the preferred method. Formulas for simulating spot rates and, consequently, future yield curves are derived. The Gaussian stochastic interest rate model employed is also utilised to simulate discount factors without incurring discretisation errors. Additionally, a par rule is introduced to prevent the model from generating prepayments below par, which would result in an upward bias in the simulated values. The present values, as well as the first- and second-order sensitivities, are presented. These sensitivities exhibit a unique characteristic of callable mortgage bonds: negative duration. This means that the value of a callable mortgage bond can actually increase when interest rates rise.