Mortgage-backed Securities

That package is worth $1 billion. What exactly is in the package? 

• 
  

  $1 billion

• the rights to receive $1 billion

• A bundle of debts worth $1 billion

• The rights to borrow $1 billion

What is a corporation?

• A legal entity

• A security

• A government Office

• A type of investment

The rights to borrow $1 billion

• Yes

• No

• I don't Know

• Whatever!

How does that corporation make its owners/investors money? 

• It buys products and resell them

• It makes money from interest payments  that the borrowers are making

• It doesn't make any money. It is a scam

• By producing and selling physical objects that people need

Notice that, if I own one share of this corporation, I get $100/year for a number of years, plus a lump sum of $1,000 at the end of the term of the security. Is that money guaranteed?

• No, it is not guaranteed but there are other means for the investors to retrieve their money. 

• Yes, it is guaranteed by FDIC

• Yes, it is guaranteed by the Corporation

• There are no guarantees to the investors. 

Then why would anyone buy shares (stocks) in these corporations

• they can provided immediate source of cash. 

• have the potential to be highly profitable

• The provide more diversification to an investor

• All of the above

How do the investment banks make their money?

• They hold shares in these corporations

• They sell their shares to investors

• They don't make any money from it.

• I don't know

If one person cannot make the payments, the corporation (entity) will take their house - since this is a mortgage-backed securities. It's rare that this happens as people tend to buy houses that are within their price range. However, what would happen if about 90% of those people default in their mortgage payment? 

Turn to a partner and brainstorm the possible consequences of that. 

If you buy a mortgage backed security, you now own:

• claim to a piece of the money paid by those who took out home loans.

• claim to a piece of someone's house.

• claim to a piece of ownership in an investment bank.

• shares of stock that have no "real" value.