Question

Debt Markets

There are several types of home mortgages in the debt market. Briefly describe fixed and variable rate mortgages the focus on balloon–payment mortgage and discuss why financial institutions in this market might prefer this type.

Both stocks and bonds have secondary markets, describe the meaning of this term and compare them to the secondary market for mortgage backed securities. Focus on the activity level.

Briefly discuss the types of financial institutions that participate in the residential mortgage market and those who supply commercial mortgages.

Answer 1

Para (a) Understand Certain Terms:-

Balloon Payment- A balloon payment is a large payment due at the end of od balloon loan such as a mortgage, a commercial loan or another type of amortized loan. A balloon loan typically for a relatively short term, and only a portion of the loans's principal balance is amortized over that period. The remaining balance is due as a final payment at the end of the term.

Fixed rate Mortgage- Any balloon loan that carries a fixed % amount due on outstanding principal amount as interest to lenders for lending money. market interest rate could not affects return to lenders in this option.

Variable Rate Mortgage- A variable interest rate loan is loan in which the interest rate charged on the outstanding balance varies as market interest rates change. As a result your payment will vary as well with principal and interest.

Facts- Financial market prefer this type of methods due to:-

1. It  comes with lower rate of interest.

2. Larger mortgage loan can be obtained with a balloon mortgage loan.

Papa (b) - Secondary market of securitie refer that where any securities either bonds or stocks are traded on regular basis after their initial offer complete to sale the public. in other words any securities that is listed on stock exchange and trade on regular basis so that market is called secondary market.

In mortgage- Secondary market - A secondary mortgage market is the market where mortgage loans and servicing rights are bought and sold between mortgage originators and mortgage aggregators (securitizers) and investors. the secondary market is extremely large and liquid

Compare bolth market in this pic.

There is various type of financial institution who participate in mortgage residential market are as under:-

1. Central Banks- oversight management of all other banks

2. Retail and Commercial Bank- Retail bank offered to individual customer and commercial to business customer.

3. Internet Banks - Similar to retail banks.

4. Credit Unions- Serve as a specific demographic per field such as teachers or member of military.

5. Saving and Loans Association- Mutually held organisations

6. Brokerage Firms and Mortgage companies.