For one to value a mortgage backed security; they would have to consider the discounting factor available in the market, the payment time of amount due, the risk-neutral measure and lastly the prepayments. However, to value a US treasury bond; the only considerations made are the face value of the security, the purchase price and the time to maturity. The purchase price mentioned above is determined by the demand and supply of the treasury debt. The factors non-existent in the valuation of a US Treasury bond but are a factor in the MBS valuation are: discounting factor available in the market, the risk-neutral measure and lastly the prepayments.
2.
1. Homeowners
Home owners purchased houses they could barely afford with non-traditional …show more content…
automobile loans, credit card loans, commercial loans some from CMO. This is unlike CMO that provided cash flows from a specific pool of mortgages. CDO was even buying the pool of mortgages from some of the lowest tranches of CMO; something that made them suffers a lot pre-2008 financial crisis. Later they all regained their working capacity and functionality after the crisis.
8.
The factor that really caused the 2008 financial crisis is the issuance of loans by banks with little or no restrictions at all; something that created an influx in the money supply in the economy. There was therefore a lot of money for people to Invest in the building of the real estate and also a lot of it available for people to buy home (that they could not afford).
9.
No; there have not been serious asset bubbles after the 20078 financial crises except for recent sharp increases in the prices of the assets that have affected the economic activity of the country. To curb this and its effects; banks have been encouraged to control their interest rates together with their lending so that it doesn’t blow out of proportion like the 2008