Question 1

Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long#NAME?erm mortgage loans.

Accepted Answer

A)  exchange rate 
B)  prepayment 
C)  reinvestment rate 
D)  interest rate 
E)  exchange rate. 
A)  exchange rate 
B)  prepayment 
C)  reinvestment rate 
D)  interest rate 
E)  exchange rate.

Question 5

_________ problem occurs when a person or institution does not have to bear the full consequences of its behavior and therefore assumes more risk than it otherwise would.

Accepted Answer

A)  asymmetric information 
B)  moral hazard 
C)  risk adjustment 
D)  specific hazard 
A)  asymmetric information 
B)  moral hazard 
C)  risk adjustment 
D)  specific hazard

Question 6

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

Question 7

Rates for adjustable-rate mortgages are commonly tied to the

Accepted Answer

A)  average prime rate over the previous year. 
B)  Fed's discount rate over the previous year. 
C)  average Treasury bill rate over the previous year. 
D)  average Treasury bond rate over the previous year. 
A)  average prime rate over the previous year. 
B)  Fed's discount rate over the previous year. 
C)  average Treasury bill rate over the previous year. 
D)  average Treasury bond rate over the previous year.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

A ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off fromthere on.

Accepted Answer

A)  balloon-payment 
B)  graduated-payment 
C)  shared-appreciation 
D)  growing-equity 
E)  none of the above 
A)  balloon-payment 
B)  graduated-payment 
C)  shared-appreciation 
D)  growing-equity 
E)  none of the above

Question 10

Non-U.S. financial institutions never hold mortgages on U.S. property.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A)  originator; borrower 
B)  borrower; originator 
C)  government; originator 
D)  none of the above 
A)  originator; borrower 
B)  borrower; originator 
C)  government; originator 
D)  none of the above

Question 12

When financial institutions originate residential mortgages, the mortgage contract should not specify

Accepted Answer

A)  whether the mortgage is federally insured. 
B)  the amount of the loan. 
C)  whether the interest rate is fixed or adjustable. 
D)  the maturity. 
E)  the mortgage contract should specify all of the above 
A)  whether the mortgage is federally insured. 
B)  the amount of the loan. 
C)  whether the interest rate is fixed or adjustable. 
D)  the maturity. 
E)  the mortgage contract should specify all of the above

Question 13

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

Accepted Answer

A)  chattel mortgage. 
B)  balloon-payment mortgage. 
C)  variable-rate mortgage. 
D)  open-ended mortgage bond. 
A)  chattel mortgage. 
B)  balloon-payment mortgage. 
C)  variable-rate mortgage. 
D)  open-ended mortgage bond.

Question 14

The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A)  stable; decreasing 
B)  increasing; stable 
C)  increasing; decreasing 
D)  decreasing; increasing 
A)  stable; decreasing 
B)  increasing; stable 
C)  increasing; decreasing 
D)  decreasing; increasing

Question 16

Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.

Accepted Answer

A) True 
 B)False

Question 17

A balloon-payment mortgage requires 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.

Accepted Answer

A) True 
 B)False

Question 18

Federally insured mortgages guarantee

Accepted Answer

A)  loan repayment to the lending financial institution. 
B)  that the interest rate will not increase during the life of the mortgage. 
C)  the lending financial institution a selling price for the mortgage in the secondary market. 
D)  all of the above 
A)  loan repayment to the lending financial institution. 
B)  that the interest rate will not increase during the life of the mortgage. 
C)  the lending financial institution a selling price for the mortgage in the secondary market. 
D)  all of the above

Question 19

The higher the level of equity invested by the borrower, the higher the probability that the loan will default.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is not a common type of mortgage-backed security according to your text?

Accepted Answer

A)  participation certificates (PCs) 
B)  collateralized mortgage obligations (CMOs) 
C)  balloon-payment mortgage certificates 
D)  private-label pass-through securities 
E)  All of the above are common types of mortgage pass-through securities. 
A)  participation certificates (PCs) 
B)  collateralized mortgage obligations (CMOs) 
C)  balloon-payment mortgage certificates 
D)  private-label pass-through securities 
E)  All of the above are common types of mortgage pass-through securities.

Exam 9: Mortgage Markets

Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages.

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

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

Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long#NAME?erm mortgage loans.

_________ problem occurs when a person or institution does not have to bear the full consequences of its behavior and therefore assumes more risk than it otherwise would.

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.

Rates for adjustable-rate mortgages are commonly tied to the

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 allows borrowers to initially make small payments on the mortgage, which are then increased on a graduated basis over the first five to ten years; payments then level off fromthere on.

Non-U.S. financial institutions never hold mortgages on U.S. property.

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

When financial institutions originate residential mortgages, the mortgage contract should not specify

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

The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity.

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.

Strong economic growth tends to reduce the probability that the issuer of a mortgage will default on its debt payments and therefore tends to decrease mortgage prices.

A balloon-payment mortgage requires 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.

Federally insured mortgages guarantee

The higher the level of equity invested by the borrower, the higher the probability that the loan will default.

Which of the following is not a common type of mortgage-backed security according to your text?

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 Operations

Pension Fund Operations

Filters

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

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.