The Bundling of Mortgages Together and the Issuing of Securities

question 46

Multiple Choice

The bundling of mortgages together and the issuing of securities for their financing made it possible for investment banks to

• A) reduce their exposure to risk in the event that the overall mortgage default rate rose.
• B) reduce the amount of capital required to back these bundled securities.
• C) build up large reserves so they would be able to meet their obligations even if the mortgage default rate rose substantially.
• D) quickly access funds to meet short-term debt obligations.

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Definitions:

Carrying Value

The book value of an asset as reflected in a company's financial statements, calculated as the original cost minus accumulated depreciation.

Straight-Line Method

A method of calculating depreciation by evenly spreading the cost of an asset over its useful life.

Effective Interest Rate

The actual cost of borrowing or the actual return on investment, taking into account the effect of compounding interest as opposed to the nominal rate.

Amortization

The gradual reduction of a debt over a period of time by periodic payments of principal and interest sufficient to repay the loan by maturity.