Reading Notes - Chapter 2 Continued

Question 1

mortgage backed securities = ?

Answer 1

a type of bond representing an investment in a pool of real estate loans (mortgages)

Question 2

mortgage = ?

Answer 2

real estate loan

Question 3

bond = ?

Answer 3

a type of investment where a loan is issued to someone trying to raise money

the investor makes money through the interest (coupons) they receive from the bond

Question 4

interest on a bond = ?

Answer 4

coupon payments

Question 5

various types of bonds = ?

Answer 5

corporate bond
government bond

Question 6

mortgage bond = ?

Answer 6

a bond backed by real estate holdings or real property

Question 7

bond default = ?

Answer 7

when the bond issuer fails to pay back the principal amount

Question 8

why do banks use mortgage backed securities?

Answer 8

mortgage backed securities are a way for banks to free up capital and encourage investors to buy into mortgages

Question 9

mortgage backed securities’ steps = ?

Answer 9

someone gets a mortgage from the bank

the bank’s money is tied up for the duration of the loan (as the principal amount hasn’t been paid)

banks outsource the mortgages in bundles to investors as a single bond for money to raise capital

the investment bank then sells these bonds to investors

Question 10

mutual fund = ?

Answer 10

an investment programme funded by shareholders that trades in diversified holdings and is professionally managed