Investment Banking and Mortgage-Backed Securities

Investment Banking and Mortgage-Backed Securities

Assessment

Interactive Video

Business

10th - 12th Grade

Hard

Created by

Ethan Morris

FREE Resource

The video explains how investment banks create mortgage-backed securities by buying mortgages and placing them in a special purpose entity. These securities are sold to investors, offering an 8% yield. Different investors have varying risk appetites, leading to the creation of tranches within collateralized debt obligations (CDOs). Tranches are categorized into senior, mezzanine, and equity, each with different risk and yield profiles. Ratings agencies assess these tranches, allowing risk-averse investors like pensions to invest in safer tranches, while risk-seeking investors like hedge funds opt for higher-yield, riskier tranches.

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10 questions

Show all answers

1.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is the primary role of an investment bank when it buys a bunch of mortgages?

To provide insurance for the mortgages

To manage the properties associated with the mortgages

To sell the mortgages directly to investors

To become the lender to homeowners

2.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is the yield promised to investors when shares are sold at $10 each?

5%

12%

8%

10%

3.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Why might some investors find mortgage-backed securities too risky?

They are not rated by any agency

They include sub-prime mortgages

They offer too high a yield

They are only available to hedge funds

4.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is a tranche in the context of mortgage-backed securities?

A type of mortgage

A class of securities with different risk levels

A method of insuring mortgages

A way to sell mortgages directly to homeowners

5.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

In a CDO, which tranche gets paid first?

Equity tranche

Mezzanine tranche

Senior tranche

Junior tranche

6.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

What is a collateralized debt obligation (CDO)?

A government bond

A direct investment in real estate

A derivative security from mortgages

A type of mortgage

7.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

How can a higher rating be achieved for a senior tranche?

By reducing the number of investors

By including more sub-prime mortgages

By obtaining a credit default swap

By increasing the interest rate

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