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21 February, 14:48

In 2006, QXQ opened their doors to finance home mortgages. One of the easiest loans for potential homeowners to obtain was called a stated income loan. These loans were money in the bank to QXQ because people just had to fill in the forms with their current salary, there was little documentation required, and everybody won. The buyers got their house and QXQ got paid. Andrew works for QXQ as an investor; he only takes clients that have at least $500,000 to invest. He has been touting this new hedge fund that he himself has invested in. It is promising 20% returns every year. He just signed up the Jones. If this scenario is too good to be true, what will likely happen to the Jones' money?

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  1. 21 February, 15:03
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    The Jones' money will be used to pay other investors.

    Explanation:

    In this case the model acts like a pyramid, with the new investors money, the ones that are already in the chain will be paid, therefore, in order to continue the business model, it would be necessary to always have new investors. Nevertheless, there will be a moment in which the model could not work anymore, so that would become a kind of recession, because it would not be possible for the model to pay all the investors the promised profits.
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