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14 February 2013 Econ 202

Creating a security that can be traded creation of a

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Creating a security (bond/stock/mortgage/contract) that can be  traded Creation of a financial asset (security) by combining other  financial assets Putting them all in a basket Giant rubber band Ford motor company bonds, Facebook bonds, Toyota  bonds and put a rubber band around them and it  represents the bundle of bonds Creating securities that are collection of various securities For example somebody wants a diversified group of low  default securities People started creating securities based on home mortgages Mortgage backed securities – at the heart of the great  recession in America in 2008 Example. Mortgage backed securities ($1 million) o M1 ($200k) o M2 ($200k) o M3 ($200k) o M4 ($200k)
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o M5 ($200k) Mortgages are being sold in secondary markets with  another bundle Mortgage backed securities and secondary markets help 
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