Question 1

A PAC support bond is most similar to which tranche in a sequential CMO?

Accepted Answer

A) A 
B) B 
C) C 
D) Z 
E) A PAC bond cannot be compared to a sequential CMO. 
A) A 
B) B 
C) C 
D) Z 
E) A PAC bond cannot be compared to a sequential CMO. D

Question 2

Which one of the following is the government agency assigned the responsibility of promoting liquidity in the home mortgage market?

Accepted Answer

A) FNMA 
B) GNMA 
C) FHLMC 
D) SPIC 
E) FDIC 
A) FNMA 
B) GNMA 
C) FHLMC 
D) SPIC 
E) FDIC B

Question 3

Which one of the following is required for the cash flows on a PAC bond to be predictable?

Accepted Answer

A) market interest rates must remain constant 
B) market interest rates must steadily decline 
C) mortgage prepayments must remain within the PAC collar 
D) PAC support bonds must be prepaid in a timely manner 
E) mortgage prepayments must exceed the specified PSA schedule 
A) market interest rates must remain constant 
B) market interest rates must steadily decline 
C) mortgage prepayments must remain within the PAC collar 
D) PAC support bonds must be prepaid in a timely manner 
E) mortgage prepayments must exceed the specified PSA schedule C

Question 4

Mortgage prepayments are best defined by which one of the following?

Accepted Answer

A) reducing the mortgage according to a schedule over the life of the mortgage 
B) paying a monthly mortgage payment before the regular due date 
C) paying off the principal faster than required by the amortization schedule 
D) paying a cash deposit when purchasing a property 
E) paying each mortgage payment as scheduled 
A) reducing the mortgage according to a schedule over the life of the mortgage 
B) paying a monthly mortgage payment before the regular due date 
C) paying off the principal faster than required by the amortization schedule 
D) paying a cash deposit when purchasing a property 
E) paying each mortgage payment as scheduled

Question 5

You recently assumed a 15-year mortgage for $250,000 at 3.5 percent interest. How much of the second monthly payment will be applied to interest?

Accepted Answer

A) $563.02 
B) $682.02 
C) $726.08 
D) $810.52 
E) $934.18 
A) $563.02 
B) $682.02 
C) $726.08 
D) $810.52 
E) $934.18

Question 6

You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?

Accepted Answer

A) The payments will decrease at a constant rate over the life of the security. 
B) The payments will increase at a decreasing rate over the life of the security. 
C) The payments will be fixed for the life of the security. 
D) The payments will vary depending upon the amount paid on the underlying mortgages each period. 
E) The payments will decrease based on the interest shown on the amortization schedule. 
A) The payments will decrease at a constant rate over the life of the security. 
B) The payments will increase at a decreasing rate over the life of the security. 
C) The payments will be fixed for the life of the security. 
D) The payments will vary depending upon the amount paid on the underlying mortgages each period. 
E) The payments will decrease based on the interest shown on the amortization schedule.

Question 7

You have a 20-year, $225,000 mortgage at 4% interest. What is the amount of your mortgage prepayment if you pay $1,700 as your second mortgage payment? Assume your first payment was the agreed upon amount.

Accepted Answer

A) $301.93 
B) $318.25 
C) $328.30 
D) $336.54 
E) $349.65 
A) $301.93 
B) $318.25 
C) $328.30 
D) $336.54 
E) $349.65

Question 8

Which one of the following statements correctly relates to GNMA securities?

Accepted Answer

A) The primary risk associated with GNMA securities is default risk. 
B) The minimum denomination of a GNMA security, when issued, is $1,000. 
C) GNMA mortgages are guaranteed solely by the FHA. 
D) GNMA was originally established as an agency within the Department of Veteran's Affairs. 
E) If you buy a GNMA security you are accepting the risk of prepayment. 
A) The primary risk associated with GNMA securities is default risk. 
B) The minimum denomination of a GNMA security, when issued, is $1,000. 
C) GNMA mortgages are guaranteed solely by the FHA. 
D) GNMA was originally established as an agency within the Department of Veteran's Affairs. 
E) If you buy a GNMA security you are accepting the risk of prepayment.

Question 9

FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?

Accepted Answer

A) providing home mortgages directly to homeowners 
B) purchasing only defaulted mortgages from banking institutions 
C) guaranteeing mortgages with the full faith and credit of the U.S. government 
D) providing guarantees equal to GNMA's to the home mortgage market 
E) promoting liquidity in the home mortgage market 
A) providing home mortgages directly to homeowners 
B) purchasing only defaulted mortgages from banking institutions 
C) guaranteeing mortgages with the full faith and credit of the U.S. government 
D) providing guarantees equal to GNMA's to the home mortgage market 
E) promoting liquidity in the home mortgage market

Question 10

Interest-only strips are securities that do which one of the following?

Accepted Answer

A) pay interest only at maturity 
B) pay only the interest cash flows to investors 
C) pay interest over the life of the security and the entire principal at maturity 
D) pay interest only when requested by the holder with all remaining amounts paid at maturity 
E) pay interest monthly and principal quarterly 
A) pay interest only at maturity 
B) pay only the interest cash flows to investors 
C) pay interest over the life of the security and the entire principal at maturity 
D) pay interest only when requested by the holder with all remaining amounts paid at maturity 
E) pay interest monthly and principal quarterly

Question 11

Which one of the following is the amount of a mortgage loan outstanding?

Accepted Answer

A) mortgage remainder 
B) mortgage face value 
C) mortgage par value 
D) mortgage principal 
E) mortgage accrual 
A) mortgage remainder 
B) mortgage face value 
C) mortgage par value 
D) mortgage principal 
E) mortgage accrual

Question 12

Which one of the following statements correctly applies to an unseasoned mortgage?

Accepted Answer

A) The mortgage is less than 30 months old. 
B) The mortgage is still held by the original mortgage company. 
C) The mortgage has at least one term or provision that is uncommon to most mortgages. 
D) The mortgage has an adjustable interest rate that has not been adjusted to date. 
E) The mortgage was obtained by a first-time home owner. 
A) The mortgage is less than 30 months old. 
B) The mortgage is still held by the original mortgage company. 
C) The mortgage has at least one term or provision that is uncommon to most mortgages. 
D) The mortgage has an adjustable interest rate that has not been adjusted to date. 
E) The mortgage was obtained by a first-time home owner.

Question 13

The value of an IO strip will most likely increase when:

Accepted Answer

A) the PSA schedule rate decreases from 200 to 10. 
B) market interest rates remain constant. 
C) prepayments increase. 
D) mortgage refinancing increases. 
E) market interest rates decrease significantly. 
A) the PSA schedule rate decreases from 200 to 10. 
B) market interest rates remain constant. 
C) prepayments increase. 
D) mortgage refinancing increases. 
E) market interest rates decrease significantly.

Question 14

Securities that are created by splitting the cash flows from mortgage pools according to specific allocation rules are called?

Accepted Answer

A) collateralized mortgage obligations 
B) collateralized housing bonds 
C) mortgage amortized strips 
D) pooled mortgage obligations 
E) secured mortgage strips 
A) collateralized mortgage obligations 
B) collateralized housing bonds 
C) mortgage amortized strips 
D) pooled mortgage obligations 
E) secured mortgage strips

Question 15

Which of the following affect the amount of funds available to a homeowner from a reverse mortgage?
I. current mortgage balance on the home
II. age of homeowner
III. location of the home
IV. appraised value of the home

Accepted Answer

A) I and IV only 
B) II and III only 
C) I, II, and IV only 
D) I, III, and IV only 
E) I, II, III, and IV 
A) I and IV only 
B) II and III only 
C) I, II, and IV only 
D) I, III, and IV only 
E) I, II, III, and IV

Question 16

How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?

Accepted Answer

A) The entire cash flow is paid to the non-PAC support bonds until those bonds are paid in full. 
B) The cash flows are divided between PAC and non-PAC bonds on a pro-rata basis. 
C) PAC payments are recomputed to a reduced fixed amount. 
D) The entire cash flow is paid to the PAC bondholders. 
E) The interest income is paid to the non-PAC bondholders with all principal amounts paid to the PAC bondholders. 
A) The entire cash flow is paid to the non-PAC support bonds until those bonds are paid in full. 
B) The cash flows are divided between PAC and non-PAC bonds on a pro-rata basis. 
C) PAC payments are recomputed to a reduced fixed amount. 
D) The entire cash flow is paid to the PAC bondholders. 
E) The interest income is paid to the non-PAC bondholders with all principal amounts paid to the PAC bondholders.

Question 17

The total payment amount on an IO strip is:

Accepted Answer

A) fixed. 
B) equal to the interest rate multiplied by the par value multiplied by the PSA rate schedule. 
C) equal to the par value multiplied by the interest rate. 
D) unknown until all payments have been made. 
E) equal to the total interest computed on the bond's amortization schedule. 
A) fixed. 
B) equal to the interest rate multiplied by the par value multiplied by the PSA rate schedule. 
C) equal to the par value multiplied by the interest rate. 
D) unknown until all payments have been made. 
E) equal to the total interest computed on the bond's amortization schedule.

Question 18

A mortgage pool is divided into a basic sequential CMO structure that includes A-, B-, C-, and Z-tranches. Which tranche will have the longest life?

Accepted Answer

A) A-tranche 
B) B-tranche 
C) C-tranche 
D) Z-tranche 
E) All tranches will have equal lives. 
A) A-tranche 
B) B-tranche 
C) C-tranche 
D) Z-tranche 
E) All tranches will have equal lives.

Question 19

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

Accepted Answer

A) Mortgage bonds are long-term securities while Macaulay duration is a short-term measure. 
B) Macaulay duration assumes the debt has a variable rate and most mortgages have a fixed rate. 
C) Macaulay duration requires bond payments to be made semiannually. 
D) Macaulay duration assumes payments are fixed and mortgage bond payments vary. 
E) Macaulay duration only applies to zero coupon bonds. 
A) Mortgage bonds are long-term securities while Macaulay duration is a short-term measure. 
B) Macaulay duration assumes the debt has a variable rate and most mortgages have a fixed rate. 
C) Macaulay duration requires bond payments to be made semiannually. 
D) Macaulay duration assumes payments are fixed and mortgage bond payments vary. 
E) Macaulay duration only applies to zero coupon bonds.

Question 20

Which one of the following is a mortgage-backed security that has first priority for scheduled principal payments?

Accepted Answer

A) priority strip bond 
B) principal strip 
C) amortized principal strip 
D) protected amortization class bond 
E) principal priority tranche 
A) priority strip bond 
B) principal strip 
C) amortized principal strip 
D) protected amortization class bond 
E) principal priority tranche

Exam 21: Mortgage-Backed Securities

A PAC support bond is most similar to which tranche in a sequential CMO?

Which one of the following is the government agency assigned the responsibility of promoting liquidity in the home mortgage market?

Which one of the following is required for the cash flows on a PAC bond to be predictable?

Mortgage prepayments are best defined by which one of the following?

You recently assumed a 15-year mortgage for $250,000 at 3.5 percent interest. How much of the second monthly payment will be applied to interest?

You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?

You have a 20-year, $225,000 mortgage at 4% interest. What is the amount of your mortgage prepayment if you pay $1,700 as your second mortgage payment? Assume your first payment was the agreed upon amount.

Which one of the following statements correctly relates to GNMA securities?

FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?

Interest-only strips are securities that do which one of the following?

Which one of the following is the amount of a mortgage loan outstanding?

Which one of the following statements correctly applies to an unseasoned mortgage?

The value of an IO strip will most likely increase when:

Securities that are created by splitting the cash flows from mortgage pools according to specific allocation rules are called?

Which of the following affect the amount of funds available to a homeowner from a reverse mortgage? I. current mortgage balance on the home II. age of homeowner III. location of the home IV. appraised value of the home

How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?

The total payment amount on an IO strip is:

A mortgage pool is divided into a basic sequential CMO structure that includes A-, B-, C-, and Z-tranches. Which tranche will have the longest life?

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

Which one of the following is a mortgage-backed security that has first priority for scheduled principal payments?

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Return, Risk, and the Security Market Line

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