Which of the following statements concerning mortgage backed securities are correct?
I. They are secured by a pool of residential mortgages.
II. A portion of the income stream is a non-taxable return of capital.
III. They are backed by the full faith and credit of the U.S. government.
IV. Their maturity depends on prepayments of the mortgages in the pool.
A) I and III only
B) I and IV only
C) II, III and IV only
D) I, II and IV only

Question

Quizplus · Accepted Answer

I. Mortgage-backed securities (MBS) are indeed secured by a pool of residential mortgages, which means they are backed by the mortgage payments of homeowners. II. A portion of the income stream from MBS can be considered a return of capital, which is not taxable. This is because investors in MBS are essentially getting back some of the principal they invested along with interest payments. IV. The maturity of MBS does depend on the prepayments of the mortgages in the pool. If homeowners pay off their mortgages early, the securities will mature faster. III is incorrect because not all MBS are backed by the full faith and credit of the U.S. government; only those issued by government-sponsored enterprises like Ginnie Mae are.

Which of the Following Statements Concerning Mortgage Backed Securities Are