Creating mortgage-backed pass-through securities:
A)can largely resolve the duration and illiquidity risk problems for a FI
B)would not have any effect on the duration and illiquidity risk problems for a FI
C)can worsen the duration and illiquidity risk problems for a FI
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

Creating mortgage-backed pass-through securities can largely resolve the duration and illiquidity risk problems for a financial institution (FI). This is because mortgage-backed securities provide an opportunity for FIs to pool a large number of mortgages and sell them to investors as a single security. This reduces the risk of any individual borrower defaulting on their loan, and thus better manages the duration risk of the mortgage portfolio. Additionally, mortgage-backed securities are highly liquid, as they are traded frequently in secondary markets.

Creating Mortgage-Backed Pass-Through Securities