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why is the allocation of default risk less of an issue for brady bonds 665350

1. Many assets trade in more than one type of market. In what types of markets do the following trade?

a. Used cars

b. Paintings

c. Rare coins

2. When mortgages are pooled into securities, the pass through agencies (Freddie Mac and Fannie Mae) typically guarantee the underlying mortgage loans.

If the homeowner defaults on the loan, the pass through agency makes good on the loan; the investor in the mortgage backed security does not bear the credit risk.

a. Why does the allocation of default risk to the pass through agency rather than the security holder make economic sense?

b. Why is the allocation of default risk less of an issue for Brady bonds?

3. How can tax motives contribute to the desire for unbundling?

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