A mortgage backed security is
A)A share of common stock based upon home mortgages
B)A financial instrument that reduces risk by pooling together a large number of mortgages into one asset
C)A financial instrument developed to reduce liquidity in the housing market
D)A financial instrument that is the combination of only subprime mortgages
E)All of the above

Question

Quizplus · Accepted Answer

A mortgage backed security is a financial instrument that combines multiple mortgages into one asset, which is then sold to investors. This reduces risk by diversifying the portfolio and spreading out potential losses. It is not a share of common stock, nor is it designed to reduce liquidity in the housing market. While it can include subprime mortgages, it is not limited to only those types of loans.

A Mortgage Backed Security Is