A Mortgage-Backed Security Is a Debt Instrument Based on a Pool

question 12

Multiple Choice

A mortgage-backed security is a debt instrument based on a pool of mortgages, and payment of that debt depends on the mortgages in the pool being paid. Many European banks invested in mortgage-backed securities. What was the effect of the financial crisis that began in the U.S. on these European banks?

• A)Since most of the mortgages in these mortgage pools were guaranteed by agencies of the U.S.government, these European banks did not suffer unexpected losses.
• B)When the mortgages in the pools were not paid, the mortgage-backed securities lost value or became worthless and these European banks suffered significant losses.
• C)These European banks might have suffered significant losses but the European central Bank bought the securities at face value.
• D)These European banks hedged their investment in U.S.mortgage-backed securities with investments in European mortgage-backed securities, so losses on U.S.mortgage-backed securities were offset by gains on European mortgage-backed securities.

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