Please respond to the following:
- Create an argument related to mortgage-back securities (MBS) that either supports or does not support that the benefits outweigh the costs. In what ways is the trading of MBS similar and different from trading of corporate bonds?
- Do you feel there exists sufficient governance over the debt and equity markets to ensure market participants are sufficiently protected? When does buyer beware matter?
*** UNDER 150 WORDS ***
Respond to this Classmate Discussion (Part 2): (short and sweet response).
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Due to the rules that were put into place by the Financial Reform Act, mortgage-back securities are beneficial to investors. Unlike before financial institutions have to get more detailed information from their customers before giving a mortgage loan and unless their portfolio meets all standard requirements they have to set aside five percent of the portfolio. This protects the investor and the economy from another credit crisis.
MBS are similar to corporate bonds in that they both earn interest from companies, however, they differ in that MBS are made of a pool of packaged mortgages. Whereas corporate bond invest totally in the company on a short, medium and long-term basis.
I am not sure if there can ever be sufficient enough governance to ensure that the debt and equity markets are sufficiently are protected because of the broad base. Buyer beware matters when an investor is looking to invest in a company but they fail to investigate the company thoroughly to ensure they are a sound company. It is possible that they could lose their principal investment.