Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Terms and concepts

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You want to borrow money from a bank and your house is used as a mortgage, which serves as a protection for the bank in case you default on your repayment. In a mortgage loan, the house represents what of the following?
  1. A debt.
  2. Collateral.
  3. An interest from lending the money.
  4. A credit risk.
Explanation
In a mortgage loan, the house serves as the collateral. Collateral is an effective way for lenders to reduce the risk of lending money by taking it as a guarantee of repayment. If you fail to pay the loan back to the bank, the collateral or your house would be confiscated as repayment for the loan.

Key Takeaway: In 2007 and 2008, when many homeowners could not repay the loans they borrowed from banks, they defaulted on their mortgage payments and their homes were seized as repayments for the loans.
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