Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is the function of a mortgage-backed security?

1. To provide loans for commercial businesses

2. To pool mortgages and provide investors with returns

3. To sell insurance on loans

4. To issue corporate bonds for funding

The correct answer is: To pool mortgages and provide investors with returns

The function of a mortgage-backed security (MBS) is to pool mortgages and provide investors with returns. MBS are created when a financial institution bundles together a number of mortgage loans and sells them as a single security to investors. This pooling process allows investors to receive monthly payments from the underlying mortgages, which often include both principal and interest. The returns on MBS are generally tied to the performance of the underlying mortgage loans, offering investors a way to gain exposure to the real estate market without directly owning the properties. In contrast, other options refer to different financial instruments or functions. Providing loans for commercial businesses does not relate to the specific structure of MBS. Selling insurance on loans pertains to mortgage insurance products, which protect lenders against defaults but do not involve the pooling aspect present in MBS. Issuing corporate bonds for funding involves borrowing directly from investors, which operates on a fundamentally different mechanism than the securitization of mortgages into MBS.