Key Concepts
1. Identify the more popular types of mortgages, and elaborate where necessary.
2. Describe how financial institutions participate in mortgage markets.
3. Explain how the mortgage problems led to the credit crisis.
POINT/COUNTER-POINT:
Is the Trading of Mortgages Similar to the Trading of Corporate Bonds?
POINT: Yes. In both cases, the issuer’s ability to repay the debt is based on income. Both types of debt
securities are highly influenced by interest rate movements.
COUNTER-POINT: No. The assessment of corporate bonds requires an analysis of financial statements
of the firms that issued the bonds. The assessment of mortgages requires an understanding of the structure
of the mortgage market (CMOs, etc.).
WHO IS CORRECT? Use the Internet to learn more about this issue and then formulate your own
opinion.
ANSWER: The question is primarily intended to make students compare mortgages to bonds. There are
some similarities, but an institutional investor who manages a corporate bond portfolio would not be able
manage a mortgage portfolio without adequate training, and vice versa.