Question 1

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

Accepted Answer

A) True 
 B)False

Question 2

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

Accepted Answer

A) True 
 B)False

Question 3

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

Accepted Answer

A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip. 
E) a prepayment claim. 
A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip. 
E) a prepayment claim.

Question 4

The prepayment model developed by the Public Securities Association is an empirically based model that reflects an average rate of prepayment based on the past experience of pools of FHA-insured mortgages

Accepted Answer

A) True 
 B)False

Question 5

Current statistics show that the servicing fee depository institutions can earn by securitizing through GNMA approximates 44 basis points.

Accepted Answer

A) True 
 B)False

Question 6

Investors in mortgage-backed pass-through securities are exposed to a variety of risks.Compared to other fixed-income securities, the most unique of these risks is

Accepted Answer

A) prepayment risk 
B) default risk 
C) credit risk 
D) interest rate risk 
E) liquidity risk 
A) prepayment risk 
B) default risk 
C) credit risk 
D) interest rate risk 
E) liquidity risk

Question 7

One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the present value of the mortgage pass-through if the entire pool is repaid after two months and there is no change in interest rates?

Accepted Answer

A) $14,989,935. 
B) $15,089,868. 
C) $15,000,000. 
D) $15,110,065. 
E) $14,889,935. 
A) $14,989,935. 
B) $15,089,868. 
C) $15,000,000. 
D) $15,110,065. 
E) $14,889,935.

Question 8

At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

Accepted Answer

A) True 
 B)False

Question 9

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly).Assume that there are no prepayments. What is the first monthly payment on the Principal Only (PO) strip?

Accepted Answer

A) $3 million. 
B) $421,928. 
C) $250,000. 
D) $299,775. 
E) $171,928. 
A) $3 million. 
B) $421,928. 
C) $250,000. 
D) $299,775. 
E) $171,928.

Question 10

Securitization of assets increases the FI's capital requirements.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following are not considered a simplifying assumption indicative of the restrictive nature of the option model approach and the option-adjusted spread?

Accepted Answer

A) The only reasons for prepayment are due to refinancing mortgages at lower rates; there is no prepayment for turnover reasons. 
B) The current discount (zero-coupon) yield curve for T-bonds is flat. 
C) The mortgage coupon rate is 10% on an outstanding pool of mortgages with an outstanding principal balance of $1 million. 
D) Mortgage loans are fully amortized, and there is no servicing fee. 
E) The interest rate movements over time change a maximum of 10% up or down each year and the time path of interest rate does not follow a binomial process. 
A) The only reasons for prepayment are due to refinancing mortgages at lower rates; there is no prepayment for turnover reasons. 
B) The current discount (zero-coupon) yield curve for T-bonds is flat. 
C) The mortgage coupon rate is 10% on an outstanding pool of mortgages with an outstanding principal balance of $1 million. 
D) Mortgage loans are fully amortized, and there is no servicing fee. 
E) The interest rate movements over time change a maximum of 10% up or down each year and the time path of interest rate does not follow a binomial process.

Question 12

FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

Accepted Answer

A) True 
 B)False

Question 13

The creation and sale of CMOs is based, at least in part, on the ability to segment the market for pass-through security products.

Accepted Answer

A) True 
 B)False

Question 14

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Accepted Answer

A) True 
 B)False

Question 15

Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security.The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. If the entire mortgage pool is repaid after the second month, what is the second month's interest and principal payments?

Accepted Answer

A) $37,441 interest and $13,275 principal. 
B) $13,275 principal and $37,441 interest. 
C) $13,312 interest and $4,986,786 principal. 
D) $4,986,786 interest and $37401 interest. 
E) $37,401 interest and $4,986,786 principal. 
A) $37,441 interest and $13,275 principal. 
B) $13,275 principal and $37,441 interest. 
C) $13,312 interest and $4,986,786 principal. 
D) $4,986,786 interest and $37401 interest. 
E) $37,401 interest and $4,986,786 principal.

Question 16

All tranches in a collateralized mortgage obligation (CMO) have the same prepayment risk exposure.

Accepted Answer

A) True 
 B)False

Question 17

Historically, FNMA has had a secured line of credit with the U.S.Treasury.

Accepted Answer

A) True 
 B)False

Question 18

All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

Accepted Answer

A) lower regulatory taxes. 
B) increased fee-based income. 
C) increased liquidity. 
D) decreased asset and liability duration mismatch. 
E) increased capital requirements. 
A) lower regulatory taxes. 
B) increased fee-based income. 
C) increased liquidity. 
D) decreased asset and liability duration mismatch. 
E) increased capital requirements.

Question 19

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Accepted Answer

A) True 
 B)False

Question 20

Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security.The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. If the entire mortgage pool is repaid at the end of the second month, what is the weighted average life of the mortgage pool?

Accepted Answer

A) 2.10 months. 
B) 2 months. 
C) 1.997 months. 
D) 1.95 months. 
E) 1.90 months. 
A) 2.10 months. 
B) 2 months. 
C) 1.997 months. 
D) 1.95 months. 
E) 1.90 months.

Exam 27: Securitization

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

The prepayment model developed by the Public Securities Association is an empirically based model that reflects an average rate of prepayment based on the past experience of pools of FHA-insured mortgages

Current statistics show that the servicing fee depository institutions can earn by securitizing through GNMA approximates 44 basis points.

Investors in mortgage-backed pass-through securities are exposed to a variety of risks.Compared to other fixed-income securities, the most unique of these risks is

At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly).Assume that there are no prepayments. What is the first monthly payment on the Principal Only (PO) strip?

Securitization of assets increases the FI's capital requirements.

Which of the following are not considered a simplifying assumption indicative of the restrictive nature of the option model approach and the option-adjusted spread?

FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.

The creation and sale of CMOs is based, at least in part, on the ability to segment the market for pass-through security products.

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

All tranches in a collateralized mortgage obligation (CMO) have the same prepayment risk exposure.

Historically, FNMA has had a secured line of credit with the U.S.Treasury.

All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Filters