Question 1

Describe "excess spread" as a from of credit enhancement.

Accepted Answer

Excess spread is basically the interest

Question 2

The "subprime mortgage" sector includes loans ________.

Accepted Answer

A)  provided to borrowers with impaired credit rating or where the loan is a second lien. 
B)  satisfying the underwriting standards of Ginnie Mae, Fannie Mae, and Freddie Mac (i.e., conforming loans). 
C)  that fail to conform for a reason other than credit quality or if the loan is not a first lien on the property. 
D)  that are not provided to borrowers with impaired credit rating or where the loan is a second lien. 
A)  provided to borrowers with impaired credit rating or where the loan is a second lien. 
B)  satisfying the underwriting standards of Ginnie Mae, Fannie Mae, and Freddie Mac (i.e., conforming loans). 
C)  that fail to conform for a reason other than credit quality or if the loan is not a first lien on the property. 
D)  that are not provided to borrowers with impaired credit rating or where the loan is a second lien.

Question 3

A stripped mortgage-backed security is created by distributing the principal and interest from a pool of underlying mortgages on an equal basis to two classes of securityholders.

Accepted Answer

A) True 
 B)False

Question 4

The cash flow of a mortgage pass-through security depends on the cash flow of the underlying mortgages, which consists of monthly mortgage payments representing interest, the scheduled repayment of principal, and any prepayments.

Accepted Answer

A) True 
 B)False

Question 5

Which of the below are NOT two forms of credit enhancement?

Accepted Answer

A)  junior-subordinate structure and monoline insurance 
B)  multiline insurance and overcollateralization 
C)  undercollateralization and excess spread 
D)  None of these 
A)  junior-subordinate structure and monoline insurance 
B)  multiline insurance and overcollateralization 
C)  undercollateralization and excess spread 
D)  None of these

Question 6

In regards to Fannie Mae and Freddie Mac, which of the below statements is FALSE?

Accepted Answer

A)  The mortgage-backed securities issued by Fannie Mae and Freddie Mac are commonly referred to as "agency MBS." 
B)  The mortgage-backed securities issued by Fannie Mae and Freddie Mac are in fact shareholder-owned corporations chartered by Congress to fulfill a public mission. 
C)  The stocks for Fannie Mae and Freddie Mac largely trade over-the-counter. 
D)  Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that (in early September 2008) were taken over by the U.S. government because of the financial difficulties it faced as a result of the subprime mortgage crisis. 
A)  The mortgage-backed securities issued by Fannie Mae and Freddie Mac are commonly referred to as "agency MBS." 
B)  The mortgage-backed securities issued by Fannie Mae and Freddie Mac are in fact shareholder-owned corporations chartered by Congress to fulfill a public mission. 
C)  The stocks for Fannie Mae and Freddie Mac largely trade over-the-counter. 
D)  Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that (in early September 2008) were taken over by the U.S. government because of the financial difficulties it faced as a result of the subprime mortgage crisis.

Question 7

The residential mortgage market can be divided into two subsectors based on the credit quality of the borrower: private label mortgage market and subprime mortgage market. Describe the loans for these two subsectors.

Accepted Answer

The private label mortgage market sector

Question 8

Which of the below statements is FALSE?

Accepted Answer

A)  A stripped mortgage-backed security is created by distributing the principal and interest from a pool of underlying mortgages on an unequal basis to two classes of securityholders. 
B)  A stripped mortgage-backed security is another example of a derivative mortgage security. 
C)  Stripped mortgage-backed securities cannot be used to hedge a portfolio exposed to prepayment risk. 
D)  There are two types of stripped mortgage-backed securities: partially stripped and IO/PO securities. 
A)  A stripped mortgage-backed security is created by distributing the principal and interest from a pool of underlying mortgages on an unequal basis to two classes of securityholders. 
B)  A stripped mortgage-backed security is another example of a derivative mortgage security. 
C)  Stripped mortgage-backed securities cannot be used to hedge a portfolio exposed to prepayment risk. 
D)  There are two types of stripped mortgage-backed securities: partially stripped and IO/PO securities.

Question 9

Although the priority rules for the disbursement of the principal payments are known, the precise amount of the principal in each period ________ known. This will depend on the cash flow and, therefore, on the principal payments of the collateral, which will depend on the ________ of the collateral. An assumed ________ allows the cash flow to be projected.

Accepted Answer

A)  is; actual prepayment rate; PSA speed 
B)  is not; actual prepayment rate; PSA speed 
C)  is; projected prepayment rate; CPR speed 
D)  is not; actual prepayment rate; SMM speed 
A)  is; actual prepayment rate; PSA speed 
B)  is not; actual prepayment rate; PSA speed 
C)  is; projected prepayment rate; CPR speed 
D)  is not; actual prepayment rate; SMM speed

Question 10

In an agency CMO, there is ________. What is being done in creating the different tranches is the redistribution of ________. In contrast, in ________, there is both credit risk and prepayment risk.

Accepted Answer

A)  no credit risk; prepayment risk; a nonagency CMO 
B)  credit risk; prepayment risk; a nonagency CMO 
C)  no credit risk; payment risk; an agency CMO 
D)  credit risk; payment risk; an agency CMO 
A)  no credit risk; prepayment risk; a nonagency CMO 
B)  credit risk; prepayment risk; a nonagency CMO 
C)  no credit risk; payment risk; an agency CMO 
D)  credit risk; payment risk; an agency CMO

Question 11

What is a PO?

Accepted Answer

In early 1987, stripped mortgage-backed

Question 12

A mortgage pass-through security ________.

Accepted Answer

A)  is a security created when one or more holders of mortgages form a collection (pool) of mortgages and sell shares or participation certificates in the pool. 
B)  is a security created when one or more holders of mortgages form a collection (pool) of mortgages where the pool consists of at least one hundred mortgages. 
C)  is considerably less liquid than an individual mortgage. 
D)  is an agency pass-through security if not issued by Ginnie Mae, Fannie Mae, or Freddie Mac. 
A)  is a security created when one or more holders of mortgages form a collection (pool) of mortgages and sell shares or participation certificates in the pool. 
B)  is a security created when one or more holders of mortgages form a collection (pool) of mortgages where the pool consists of at least one hundred mortgages. 
C)  is considerably less liquid than an individual mortgage. 
D)  is an agency pass-through security if not issued by Ginnie Mae, Fannie Mae, or Freddie Mac.

Question 13

Suppose that an investor owns a pass-through in which the remaining mortgage balance at the beginning of some month is $300 million. Assuming that the CPR is 5.00% and the scheduled principal payment is $4 million, what is the estimated prepayment for the month?

Accepted Answer

A)  $1,242,789 
B)  $1,262,534 
C)  $1,273,128 
D)  $1,284,465 
A)  $1,242,789 
B)  $1,262,534 
C)  $1,273,128 
D)  $1,284,465

Question 14

In early 1987, stripped mortgage-backed securities began to be issued allocating all the interest to one class [called the ________ class] and the entire principal to the other class [called the ________ class].

Accepted Answer

A)  principal-only (PO); interest-only (IO) 
B)  interest-only (IO); prepayment-only (PO) 
C)  interest-only (IO); principal-only (PO) 
D)  stripped-only (SO); payment-only (PO) 
A)  principal-only (PO); interest-only (IO) 
B)  interest-only (IO); prepayment-only (PO) 
C)  interest-only (IO); principal-only (PO) 
D)  stripped-only (SO); payment-only (PO)

Question 15

In a CMO structure, there is one bond class called a branch.

Accepted Answer

A) True 
 B)False

Question 16

The cash flow of a mortgage pass-through is projected based on an assumed PSA.

Accepted Answer

A) True 
 B)False

Question 17

Which of the below statements is FALSE?

Accepted Answer

A)  In 1987, CMO issuers began issuing bonds with the characteristic that if prepayments are within a specified range, the cash flow pattern is known. The greater predictability of the cash flow for these classes of bonds, referred to as planned amortization class (PA
C)  bonds, occurs because there is a principal repayment schedule that must be satisfied. 
B)  PAC bondholders have priority over all other classes in the CMO issue in receiving principal payments from the underlying collateral. 
C)  The greater certainty of the cash flow for the non-PAC bonds comes at the expense of the PAC classes, called the support bonds or companion bonds. It is these bonds that absorb the prepayment risk. 
D)  Because PAC bonds have protection against both extension risk and contraction risk, they are said to provide two-sided prepayment protection. 
A)  In 1987, CMO issuers began issuing bonds with the characteristic that if prepayments are within a specified range, the cash flow pattern is known. The greater predictability of the cash flow for these classes of bonds, referred to as planned amortization class (PA
C)  bonds, occurs because there is a principal repayment schedule that must be satisfied. 
B)  PAC bondholders have priority over all other classes in the CMO issue in receiving principal payments from the underlying collateral. 
C)  The greater certainty of the cash flow for the non-PAC bonds comes at the expense of the PAC classes, called the support bonds or companion bonds. It is these bonds that absorb the prepayment risk. 
D)  Because PAC bonds have protection against both extension risk and contraction risk, they are said to provide two-sided prepayment protection.

Question 18

In regards to Ginnie Mae, which of the below statements is FALSE?

Accepted Answer

A)  Ginnie Mae, like Fannie Mae and Freddie Mac, was created by Congress to increase the supply of capital to the residential mortgage market and to provide support for an active secondary market. 
B)  When Ginnie Mae guarantees securities issued by approved lenders, Ginnie Mae permits these lenders to convert illiquid individual loans into liquid securities backed by the U.S. government. 
C)  Ginnie Mae is a federally related institution and, as a result, the pass-through securities that it guarantees carry the full faith and credit of the U.S. government. 
D)  Pass-through securities that carry Ginnie Mae's guarantee and bear its name are issued by lenders approved by the federal government and these lenders do not include thrifts. 
A)  Ginnie Mae, like Fannie Mae and Freddie Mac, was created by Congress to increase the supply of capital to the residential mortgage market and to provide support for an active secondary market. 
B)  When Ginnie Mae guarantees securities issued by approved lenders, Ginnie Mae permits these lenders to convert illiquid individual loans into liquid securities backed by the U.S. government. 
C)  Ginnie Mae is a federally related institution and, as a result, the pass-through securities that it guarantees carry the full faith and credit of the U.S. government. 
D)  Pass-through securities that carry Ginnie Mae's guarantee and bear its name are issued by lenders approved by the federal government and these lenders do not include thrifts.

Question 19

Traditional corporate bond buyers sought a structure with both the characteristics of a ________ and high credit quality. While CMOs satisfied the ________, they did not satisfy the ________.

Accepted Answer

A)  corporate bond; second condition; first condition 
B)  government bond; first condition; second condition 
C)  corporate bond; first condition; second condition 
D)  government bond; second condition; first condition 
A)  corporate bond; second condition; first condition 
B)  government bond; first condition; second condition 
C)  corporate bond; first condition; second condition 
D)  government bond; second condition; first condition

Question 20

The average life of a mortgage-backed security is the average time to receipt of principal payments (scheduled principal payments and projected prepayments), weighted by the amount of principal expected.

Accepted Answer

A) True 
 B)False

Exam 23: Mortgage-Backed Securities Market

Describe "excess spread" as a from of credit enhancement.

The "subprime mortgage" sector includes loans ________.

A stripped mortgage-backed security is created by distributing the principal and interest from a pool of underlying mortgages on an equal basis to two classes of securityholders.

The cash flow of a mortgage pass-through security depends on the cash flow of the underlying mortgages, which consists of monthly mortgage payments representing interest, the scheduled repayment of principal, and any prepayments.

Which of the below are NOT two forms of credit enhancement?

In regards to Fannie Mae and Freddie Mac, which of the below statements is FALSE?

The residential mortgage market can be divided into two subsectors based on the credit quality of the borrower: private label mortgage market and subprime mortgage market. Describe the loans for these two subsectors.

Which of the below statements is FALSE?

In an agency CMO, there is ________. What is being done in creating the different tranches is the redistribution of ________. In contrast, in ________, there is both credit risk and prepayment risk.

What is a PO?

A mortgage pass-through security ________.

Suppose that an investor owns a pass-through in which the remaining mortgage balance at the beginning of some month is $300 million. Assuming that the CPR is 5.00% and the scheduled principal payment is $4 million, what is the estimated prepayment for the month?

In early 1987, stripped mortgage-backed securities began to be issued allocating all the interest to one class [called the ________ class] and the entire principal to the other class [called the ________ class].

In a CMO structure, there is one bond class called a branch.

The cash flow of a mortgage pass-through is projected based on an assumed PSA.

Which of the below statements is FALSE?

In regards to Ginnie Mae, which of the below statements is FALSE?

Traditional corporate bond buyers sought a structure with both the characteristics of a ________ and high credit quality. While CMOs satisfied the ________, they did not satisfy the ________.

The average life of a mortgage-backed security is the average time to receipt of principal payments (scheduled principal payments and projected prepayments), weighted by the amount of principal expected.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

In an agency CMO, there is . What is being done in creating the different tranches is the redistribution of . In contrast, in , there is both credit risk and prepayment risk.

In early 1987, stripped mortgage-backed securities began to be issued allocating all the interest to one class [called the class] and the entire principal to the other class [called the class].

Traditional corporate bond buyers sought a structure with both the characteristics of a and high credit quality. While CMOs satisfied the , they did not satisfy the .