Question

Rimsa savings is a savings institution that provided Carson Company with a mortgage for its office building. Rimsa currently offered to refinance the mortgage if Caron Company will change to a fixed-rate loan to an adjustable rate-loan. Assume there is an upward-sloping yield curve.

If Rimsa maintains the mortgage on the office building purchased by Carson Company, who is the ultimate source of money that was provided for the office building? If Rimsa sells the mortgage in the secondary market to a pension fund, who is the source that is essentially financing the office building? Why would a pension fund be willing to purchase this mortgage in the secondary market?

Answer 1

1- If Rimsa maintains the mortgage on the office building purchased by Carsons, then the ultimate source of the money is the deposits or the issued bonds by the Rimsa (as Rimsa is a savins institution)

2- If the mortagage is sold to pension funds then the ultimate source of funding are the people whose savings have been deposited in those pension funds.

3- As its assumed that there is an upward sloping yield curve, that means longer terms bonds have higher yield than shorter ones. And mortgage is a long term asset. So pesnion funds woudl be willing to buy the mortgage expecting a higher return on it