Mortgage Backed Securities

Mortgage Backed Securities

Initial Post

Mortgage backed securities are created from securities that are backed with securities that derive from pooling several mortgages together. The investors buy the package from the bank and assume the role of lending the money to home buyers. Despite the investment varying among the issuers, the mortgage backed securities can be bought and sold by brokers. The benefits of investing in mortgage backed securities outweigh the cost because the investor is guaranteed of cash flow by the agencies that are backed by the US government (McConnell, & Buser, 2011). Also, the investor is given large portfolio to select from with the portfolio having potential for adjusted risk returns that are attractive. Trading in MBS is similar to trading in corporate bonds since they are both made up of a bundle of home loans that are purchased from the bank as the issuer. Moreover, both MBS and corporate binds are entitled to periodic payments. However, both securities have difference in that whereas MBS derive from creating a pool of mortgages sold to interested investors corporate bonds originate from a pool of non-mortgage assets.

Peer Response

I agree with your observation that mortgage backed securities are asset backed securities secured by realty loans. Moreover, the observation that both MBS and corporate bonds incur similar risks is perfectly correct due to shift in interest rates, market risks, inflation and event oriented risks. Further, I agree with your sentiments that difference exist between MBS and Corporate bonds since MBS pay twice a year or semi-annually while corporate bond payments are made monthly (McConnell, & Buser, 2011). It is also prudent to argue that the value of corporate bond diminish after every payment while that of MBS does not.

References

McConnell, J. J., & Buser, S. A. (2011). The origins and evolution of the market for mortgage-backed securities. Annu. Rev. Financ. Econ., 3(1), 173-192.0; https://business.purdue.edu/faculty/mcconnell/publications/The-Origins-and-Evolution-of-the-Market.pdf

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