What type of investment strategy would utilize mortgage-backed securities?

What type of investment strategy would utilize mortgage-backed securities?

• A. Long-term growth investment
• B. Short-term trading
• C. Income-generating investment
• D. High-risk speculative investment

Answer: (C)

Mortgage-backed securities (MBS) are financial instruments that are created by pooling various mortgage loans and selling them as a single security. Investors in MBS receive periodic payments that are derived from the principal and interest payments made by homeowners on their mortgage loans. The primary purpose of investing in mortgage-backed securities is to generate regular income. This is due to the steady cash flow that comes from the mortgage payments that underpin these securities. Investors looking for stable and predictable income, such as retirement fund managers, municipalities, or individuals seeking to balance their portfolios, often favor MBS because they can provide higher yields than other fixed-income investments like government bonds while maintaining a relatively low level of risk. In contrast, long-term growth investments typically focus on capital appreciation rather than income generation, short-term trading aims at taking advantage of market volatility for quick profits, and high-risk speculative investments involve significant risks and potential for high returns, often not aligning with the characteristics of mortgage-backed securities. These features reinforce why MBS are classified specifically as an income-generating investment.

Mortgage-backed securities (MBS) are financial instruments that are created by pooling various mortgage loans and selling them as a single security. Investors in MBS receive periodic payments that are derived from the principal and interest payments made by homeowners on their mortgage loans.

The primary purpose of investing in mortgage-backed securities is to generate regular income. This is due to the steady cash flow that comes from the mortgage payments that underpin these securities. Investors looking for stable and predictable income, such as retirement fund managers, municipalities, or individuals seeking to balance their portfolios, often favor MBS because they can provide higher yields than other fixed-income investments like government bonds while maintaining a relatively low level of risk.

In contrast, long-term growth investments typically focus on capital appreciation rather than income generation, short-term trading aims at taking advantage of market volatility for quick profits, and high-risk speculative investments involve significant risks and potential for high returns, often not aligning with the characteristics of mortgage-backed securities. These features reinforce why MBS are classified specifically as an income-generating investment.