Canadian Securities Course (CSC) Level 2 Practice Exam

What benefits do Mortgage Backed Securities offer?

1. Higher liquidity

2. Government guaranteed

3. Low yield

4. High volatility

The correct answer is: Government guaranteed

Mortgage Backed Securities (MBS) provide various benefits, and one of the most significant is the government guarantee. When MBS are backed by government-sponsored entities like Fannie Mae or Freddie Mac in the United States, investors are protected against default risk. This guarantee reassures investors that even if some homeowners default on their mortgages, they will still receive their payments. The inclusion of a government guarantee enhances the appeal of MBS, attracting a diverse range of investors looking for more secure fixed-income investments. It contributes to the stability and reliability of these securities, making them a preferred choice for many institutions and individuals seeking to manage their risk in their portfolios. While liquidity is also a characteristic of MBS, the extent can vary, and not all MBS are equally liquid. The yield on MBS can be competitive, but it is primarily influenced by market conditions and the underlying mortgages, not categorically low. Volatility typically does not define MBS, as they tend to be less volatile than equities; hence, strong fluctuations are not common compared to more speculative investments.