Question 1

During the early years of a mortgage, most of the monthly payment reflects principal.

Accepted Answer

A) True 
 B)False

Question 2

Bear Stearns commonly used __________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.

Accepted Answer

A)  commercial paper 
B)  Treasury securities 
C)  its stock 
D)  mortgages 
A)  commercial paper 
B)  Treasury securities 
C)  its stock 
D)  mortgages

Question 3

From the perspective of the lending financial institution, interest rate risk is

Accepted Answer

A)  lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage. 
B)  lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. 
C)  higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. 
D)  higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage. 
A)  lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage. 
B)  lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. 
C)  higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage. 
D)  higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.

Question 4

For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.

Accepted Answer

A)  greater; greater 
B)  greater; lower 
C)  lower; greater 
D)  lower; lower 
A)  greater; greater 
B)  greater; lower 
C)  lower; greater 
D)  lower; lower

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 __________ 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

Question 7

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 income level. 
D)  the borrower's credit history. 
E)  Credit risk is affected by all of the above. 
A)  economic conditions. 
B)  the level of equity invested by the borrower 
C)  the borrower's income level. 
D)  the borrower's credit history. 
E)  Credit risk is affected by all of the above.

Question 8

Which of the following is not a guarantor of federally insured mortgages?

Accepted Answer

A)  Federal Housing Administration (FH
A)  
B)  Veterans Administration (V
A)  
C)  Federal Deposit Insurance Corporation (FDI
C)  
D)  All of the above are guarantors of federally insured mortgages. 
A)  Federal Housing Administration (FH
A)  
B)  Veterans Administration (V
A)  
C)  Federal Deposit Insurance Corporation (FDI
C)  
D)  All of the above are guarantors of federally insured mortgages.

Question 9

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 10

In the earlier years of a mortgage,

Accepted Answer

A)  most of the monthly payment reflects principal reduction. 
B)  most of the monthly payment reflects interest. 
C)  about half of the monthly payment reflects interest. 
D)  all of the monthly payment reflects principal reduction. 
A)  most of the monthly payment reflects principal reduction. 
B)  most of the monthly payment reflects interest. 
C)  about half of the monthly payment reflects interest. 
D)  all of the monthly payment reflects principal reduction.

Question 11

The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.

Accepted Answer

A)  primary 
B)  secondary 
C)  money 
D)  none of the above 
A)  primary 
B)  secondary 
C)  money 
D)  none of the above

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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)  lower; higher 
E)  Answers B and C are correct 
A)  higher; shorter 
B)  higher; longer 
C)  lower; shorter 
D)  lower; higher 
E)  Answers B and C are correct

Question 14

Which of the following is not a correct description of qualified mortgages?

Accepted Answer

A)  They must comply with regulations issued by the Consumer Financial Protection Bureau. 
B)  Their term cannot exceed 30 years. 
C)  They cannot be interest-only mortgages or result in negative amortization. 
D)  They must be retained by the lending institution that originated the mortgages and cannot be sold. 
E)  They place limits on the borrower's debt-to-income ratio. 
A)  They must comply with regulations issued by the Consumer Financial Protection Bureau. 
B)  Their term cannot exceed 30 years. 
C)  They cannot be interest-only mortgages or result in negative amortization. 
D)  They must be retained by the lending institution that originated the mortgages and cannot be sold. 
E)  They place limits on the borrower's debt-to-income ratio.

Question 15

The credit crisis is mostly attributed to the use of:

Accepted Answer

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

Question 16

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.

Accepted Answer

A)  below 
B)  above 
C)  equal to 
D)  all of the above are very common 
A)  below 
B)  above 
C)  equal to 
D)  all of the above are very common

Question 17

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

Accepted Answer

A)  It is similar to a graduated-payment mortgage 
B)  It allows borrowers to initially make small payments on the mortgage. 
C)  It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage. 
D)  It involves payments that level off after the first five to ten years of the mortgage. 
A)  It is similar to a graduated-payment mortgage 
B)  It allows borrowers to initially make small payments on the mortgage. 
C)  It involves increased payments, on a graduated basis, over the first five to ten years of the mortgage. 
D)  It involves payments that level off after the first five to ten years of the mortgage.

Question 18

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 19

Mortgages are rarely sold in the secondary market.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 9: Mortgage Markets

During the early years of a mortgage, most of the monthly payment reflects principal.

Bear Stearns commonly used __________ as collateral when borrowing short-term funds, but its funding was cut off because prospective creditors questioned the quality of the collateral.

From the perspective of the lending financial institution, interest rate risk is

For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage.

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

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

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

Which of the following is not a guarantor of federally insured mortgages?

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

In the earlier years of a mortgage,

The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.

"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 is not a correct description of qualified mortgages?

The credit crisis is mostly attributed to the use of:

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.

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

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.

Mortgages are rarely sold in the secondary market.

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.

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

For any given interest rate, the shorter the life of the mortgage, the the monthly payment and the the total payments over the life of the mortgage.

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