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

What is the main benefit to investors of purchasing mortgage-backed securities?

1. Guaranteed high returns

2. Regular interest payments and principal returns

3. Protection against inflation

4. Tax-free interest income

The correct answer is: Regular interest payments and principal returns

The main benefit to investors of purchasing mortgage-backed securities lies in the regular interest payments and principal returns that these securities provide. Mortgage-backed securities are created by pooling various mortgage loans and selling shares of this pool to investors. As homeowners make their mortgage payments, the cash flows generated from these payments are passed on to the owners of the mortgage-backed securities. This structure allows investors to receive a steady stream of income from interest payments, which can provide reliable cash flow, making these securities appealing to those seeking regular income. Additionally, as the homeowners repay their mortgages, a portion of the principal is also returned to the investors, further enhancing the appeal of mortgage-backed securities as a relatively stable investment option. While some investors may be attracted to other characteristics like inflation protection or potential tax benefits, the fundamental appeal of mortgage-backed securities is primarily the consistent income they deliver through interest and principal repayments.