Question 1

Which of the following are important criteria that financial institutions consider when assessing the creditworthiness of a prospective borrower for a mortgage?

Accepted Answer

A) the down payment the borrower will make 
B) the borrower's debt-to-income ratio 
C) the borrower's credit score 
D) all of the above 
A) the down payment the borrower will make 
B) the borrower's debt-to-income ratio 
C) the borrower's credit score 
D) all of the above D

Question 2

A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities.

Accepted Answer

A) default insurance contract 
B) default risk swap 
C) credit default swap 
D) collateralized debt obligation 
A) default insurance contract 
B) default risk swap 
C) credit default swap 
D) collateralized debt obligation C

Question 3

Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs)specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following was part of the U.S. government's response to the credit crisis?

Accepted Answer

A) Troubled Asset Relief Program (TARP) 
B) Housing and Economic Recovery Act 
C) Homeowners' Mortgage Guarantee  Act 
D) Troubled Asset Relief Program (TARP)AND  Housing and Economic Recovery Act 
A) Troubled Asset Relief Program (TARP) 
B) Housing and Economic Recovery Act 
C) Homeowners' Mortgage Guarantee  Act 
D) Troubled Asset Relief Program (TARP)AND  Housing and Economic Recovery Act

Question 5

The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to

Accepted Answer

A) interest rate risk. 
B) reinvestment rate risk. 
C) credit risk. 
D) insurance risk. 
A) interest rate risk. 
B) reinvestment rate risk. 
C) credit risk. 
D) insurance risk.

Question 6

A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.

Accepted Answer

A) graduated-payment mortgage 
B) growing-equity mortgage 
C) second mortgage 
D) shared-appreciation mortgage 
A) graduated-payment mortgage 
B) growing-equity mortgage 
C) second mortgage 
D) shared-appreciation mortgage

Question 7

"Securitization" refers to the private insurance of conventional mortgages.

Accepted Answer

A) True 
 B)False

Question 8

From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.

Accepted Answer

A) higher; shorter 
B) higher; longer 
C) lower; shorter 
D) higher; longer AND lower; shorter 
A) higher; shorter 
B) higher; longer 
C) lower; shorter 
D) higher; longer AND lower; shorter

Question 9

Which of the following was a major contributor to the credit crisis?

Accepted Answer

A) strict criteria applied by mortgage originators 
B) liberal criteria applied by mortgage originators 
C) very strict credit ratings applied to mortgage-backed securities 
D) fixed-rate mortgages with long terms to maturity 
A) strict criteria applied by mortgage originators 
B) liberal criteria applied by mortgage originators 
C) very strict credit ratings applied to mortgage-backed securities 
D) fixed-rate mortgages with long terms to maturity

Question 10

In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).

Accepted Answer

A) balloon payments 
B) caps 
C) tranches 
D) strips 
A) balloon payments 
B) caps 
C) tranches 
D) strips

Question 11

The probability that a borrower will default (credit risk)is influenced by all of the following EXCEPT

Accepted Answer

A) economic conditions. 
B) the level of equity invested by the borrower. 
C) the borrower's debt-to-income level. 
D) the borrower's credit score. 
E) Credit risk is affected by all of these. 
A) economic conditions. 
B) the level of equity invested by the borrower. 
C) the borrower's debt-to-income level. 
D) the borrower's credit score. 
E) Credit risk is affected by all of these.

Question 12

Mortgage-backed securities are commonly contained within collateralized debt obligations.

Accepted Answer

A) True 
 B)False

Question 13

___ economic growth will probably ____ the risk premium on mortgages and cause the price of mortgages in the secondary market to _____.

Accepted Answer

A) Strong; increase; decrease 
B) Strong; increase; increase 
C) Weak; increase; decrease 
D) Weak; increase; increase 
E) Weak; decrease; decrease 
A) Strong; increase; decrease 
B) Strong; increase; increase 
C) Weak; increase; decrease 
D) Weak; increase; increase 
E) Weak; decrease; decrease

Question 14

Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages.

Accepted Answer

A) True 
 B)False

Question 15

A financial institution may service a mortgage even after selling it.

Accepted Answer

A) True 
 B)False

Question 16

Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.

Accepted Answer

A) True 
 B)False

Question 17

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs)are typically

Accepted Answer

A) 2 percent per year and 5 percent for the mortgage lifetime. 
B) 5 percent per year and 15 percent for the mortgage lifetime. 
C) 0 percent per year and 10 percent for the mortgage lifetime. 
D) 3 percent per year and 8 percent for the mortgage lifetime. 
A) 2 percent per year and 5 percent for the mortgage lifetime. 
B) 5 percent per year and 15 percent for the mortgage lifetime. 
C) 0 percent per year and 10 percent for the mortgage lifetime. 
D) 3 percent per year and 8 percent for the mortgage lifetime.

Question 18

American International Group (AIG)was a huge _______ of credit default swaps (CDS)that offered protection against mortgage defaults, so when many mortgages defaulted during the credit crisis, AIG was obliged to _______.

Accepted Answer

A) seller; repurchase the CDS contracts it had sold 
B) buyer; sell its CDS contracts to raise capital 
C) buyer; surrender its CDS contracts to the Federal Reserve 
D) seller; make large payments to the buyers of the CDS contracts 
A) seller; repurchase the CDS contracts it had sold 
B) buyer; sell its CDS contracts to raise capital 
C) buyer; surrender its CDS contracts to the Federal Reserve 
D) seller; make large payments to the buyers of the CDS contracts

Question 19

The valuation of mortgage-backed securities is difficult because of limited  transparency.

Accepted Answer

A) True 
 B)False

Question 20

____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on FHA and VA mortgages that meet specific criteria .

Accepted Answer

A) Freddie Mac 
B) Ginnie Mae 
C) Fannie Mae 
D) None of these are correct. 
A) Freddie Mac 
B) Ginnie Mae 
C) Fannie Mae 
D) None of these are correct.

Exam 9: Mortgage Markets

Which of the following are important criteria that financial institutions consider when assessing the creditworthiness of a prospective borrower for a mortgage?

A __________ is a privately negotiated contract that protects investors against the risk of default on particular debt securities such as mortgage-backed securities.

Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs)specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life.

Which of the following was part of the U.S. government's response to the credit crisis?

The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to

A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.

"Securitization" refers to the private insurance of conventional mortgages.

From the perspective of the lending financial institution, there is a ____ degree of interest rate risk for ____-maturity mortgages.

Which of the following was a major contributor to the credit crisis?

In a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).

The probability that a borrower will default (credit risk)is influenced by all of the following EXCEPT

Mortgage-backed securities are commonly contained within collateralized debt obligations.

___ economic growth will probably ____ the risk premium on mortgages and cause the price of mortgages in the secondary market to _____.

Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages.

A financial institution may service a mortgage even after selling it.

Speculators sell credit default swaps to benefit from the default of specific subprime mortgages.

Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs)are typically

American International Group (AIG)was a huge _______ of credit default swaps (CDS)that offered protection against mortgage defaults, so when many mortgages defaulted during the credit crisis, AIG was obliged to _______.

The valuation of mortgage-backed securities is difficult because of limited transparency.

____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on FHA and VA mortgages that meet specific criteria .

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

From the perspective of the lending financial institution, there is a degree of interest rate risk for -maturity mortgages.

_ economic growth will probably the risk premium on mortgages and cause the price of mortgages in the secondary market to ___.

American International Group (AIG)was a huge _ of credit default swaps (CDS)that offered protection against mortgage defaults, so when many mortgages defaulted during the credit crisis, AIG was obliged to _.