Question

a. What are the pros and cons of asset-backed securities such as mortgage-backed

securities to the retail or institutional investors?

b. What are the roles played by various financial institution(s)?

c. Mutual funds have been gaining popularity among investors. From the investors’ point of view, illustrate why it is usually a better choice to buy the mutual funds than to buy asset-backed securities.

Answer 1

1. Pros of mortgage backed securities- it will be providing an opportunity for the borrower in order to help themself get the loan by pledging their assets at mortgage.this type of mortgage are also meaning that borrowers will be having lower interest and lower payments to make because these are having a lower risk associated with their default.

Cons related to asset backed securities are that asset-backed security will be having a higher risk for the borrower as he have to pledge asset and these will be highly risky loans as any default will be triggering sale of the assets. It will also mean that borrower cannot sell the assets in advance.

B. Financial institutions are playing the role of making the credit available to different sections of society and they are also responsible for maintenance of a high degree of Liquidity in the overall financial system and they are also playing the role of the financial intermediary along with their facilitating a proper implementation of rules and regulations formed by central banks and Central governments.

C. it is a better choice to buy the mutual funds rather than to buy the Asset backed securities because mutual fund are providing them an opportunity for maximization of the rate of return and it will also offer them higher rate of return whereas securities which are backed by asset will be offering a lower rate of return and those will be highly secured in nature.

Mutual Funds will also offer with lower fees and professional management of the assets and flexibility in terms of investment.