Question

1. How Morgan Stanley in 2007 lost $9B on subprime mortgage bets. What were the major assumptions in the fixed income models that went awry?

Answer 1

Morgan atanley in 2007 got a huge loss in subprime mortgage bets.It was 1st quarterly loss in 72years.

The company took a $9.4 billion charge on subprime-linked investment for the fourth quarter, bringing its cumulative charges for subprime mortgages to $10.8 billion.

In a stark reflection of its diminished status it also said it would sell a $5 billion stake to chiness investment fund to shore up its capital.

The developments were stunning turn of events for morgan Stanley , an offshoot of the Morgan banking dynasty that has counseled corporate america since the Depression.

Assumptions in fixed income model

These funds buy investments that pay a fixed rate of return like goverment bonds, investment-grade corporate bounds and high-yield corporate bonds.They aim to have money coming into the funds on a regular basic,mostly through interest that the funds earn.

It will give fixed income.If you are investing $10000 and you know here the return willbe fixed every year.

Lets take an example yo invest $10000 in a bond and the company promices you to give 10% for 1st year and in next yaer the company will give you 15% then in 3rd year 20%, so every year you know your returns on th bond.

Here the risk level is very low.