Exam 9: Mortgage Markets

An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgage price to decrease.

Mortgages are rarely sold in the secondary market.

Some adjustable-rate mortgages (ARMs)contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period.

A mortgage with low initial payments that increase over time without ever leveling off is a

A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.

____ mortgages enable more people with relatively lower income, or high existing debt, or a small down payment to purchase homes.

A balloon-payment mortgage requires only interest payments for a three- to five-year period. At the end of this period, full payment of the principal (the balloon payment)is required.

Rates for adjustable-rate mortgages are commonly tied to the

A mortgage that requires interest payments for a three- to five-year period, then full payment of principal, is a(n)

Mortgage companies, commercial banks, and savings institutions are the primary originators of mortgages.

At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.

____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates.

Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?

An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.

At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time.

An investor in interest-only collateralized mortgage obligations (CMOs)would not be concerned that homeowners will prepay the underlying mortgages.

The interest rate on a second mortgage is ____ the rate on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.

Which of the following is NOT true with respect to a growing-equity mortgage?

An adjustable-rate mortgage increases interest rate risk for the ____,  but reduces interest rate risk for the ____.

A financial institution has a higher degree of interest rate risk on a ____ than a ____.