Question 1

Full amortization of a twenty-five-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Accepted Answer

A) True 
 B)False

Question 2

Most mortgage-backed bond issues conducted by deposit-taking institutions are under-collateralized.

Accepted Answer

A) True 
 B)False

Question 3

The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $50 million and pays 6 percent annually. Tranche B has a face value of $50 million and pays 8 percent annually. All mortgages have maturities of 30 years. What are the principals outstanding on Tranches A and B, respectively, after the CMO distributes the $10 million of cash flows?

Accepted Answer

A) $50 million; $47 million. 
B) $47 million; $50 million. 
C) $48 million; $48 million. 
D) $50 million; $48 million. 
E) $50 million; $50 million. 
A) $50 million; $47 million. 
B) $47 million; $50 million. 
C) $48 million; $48 million. 
D) $50 million; $48 million. 
E) $50 million; $50 million.

Question 4

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Accepted Answer

A) True 
 B)False

Question 5

Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows.

Accepted Answer

A) True 
 B)False

Question 6

The underlying NHA MBS 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments. What is the first monthly payment on the Principal Only (PO) strip?

Accepted Answer

A) $3 million. 
B) $421,928. 
C) $250,000. 
D) $299,775. 
E) $171,928. 
A) $3 million. 
B) $421,928. 
C) $250,000. 
D) $299,775. 
E) $171,928.

Question 7

CMHC supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by other government agencies.

Accepted Answer

A) True 
 B)False

Question 8

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.

Accepted Answer

A) True 
 B)False

Question 9

Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. What is the monthly payment on the mortgage pass-through?

Accepted Answer

A) $37,500. 
B) $45,231. 
C) $45,309. 
D) $50,713. 
E) $55,256. 
A) $37,500. 
B) $45,231. 
C) $45,309. 
D) $50,713. 
E) $55,256.

Question 10

When a Special Purpose Vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets.

Accepted Answer

A) True 
 B)False

Question 11

The securities that form a NHA CMHC pass-through are Treasury bonds, bills, and notes.

Accepted Answer

A) True 
 B)False

Question 12

One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the present value of the mortgage pass-through if the entire pool is repaid after two months and there is no change in interest rates?

Accepted Answer

A) $14,989,935. 
B) $15,089,868. 
C) $15,000,000. 
D) $15,110,065. 
E) $14,889,935. 
A) $14,989,935. 
B) $15,089,868. 
C) $15,000,000. 
D) $15,110,065. 
E) $14,889,935.

Question 13

One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the weighted average life of the above mortgage pool?

Accepted Answer

A) 30 years. 
B) 2 months. 
C) 1.998 months. 
D) 1 month. 
E) 1.5 months. 
A) 30 years. 
B) 2 months. 
C) 1.998 months. 
D) 1 month. 
E) 1.5 months.

Question 14

All else equal, advantages of a DTI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

Accepted Answer

A) lower regulatory taxes. 
B) increased fee-based income. 
C) increased liquidity. 
D) decreased asset and liability duration mismatch. 
E) increased capital requirements. 
A) lower regulatory taxes. 
B) increased fee-based income. 
C) increased liquidity. 
D) decreased asset and liability duration mismatch. 
E) increased capital requirements.

Question 15

A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

Accepted Answer

A) True 
 B)False

Question 16

CMHC will securitize conventional mortgages issued by Canadian deposit-taking institutions.

Accepted Answer

A) True 
 B)False

Question 17

Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. If the entire mortgage pool is repaid at the end of the second month, what is the weighted average life of the mortgage pool?

Accepted Answer

A) 2.10 months. 
B) 2 months. 
C) 1.997 months. 
D) 1.95 months. 
E) 1.90 months. 
A) 2.10 months. 
B) 2 months. 
C) 1.997 months. 
D) 1.95 months. 
E) 1.90 months.

Question 18

The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class that it is responsible for securitizing.

Accepted Answer

A) True 
 B)False

Question 19

The three Canadian government agencies that sponsor the creation of mortgage-backed, pass through securities are: CMHC, FNMA, and CDIC.

Accepted Answer

A) True 
 B)False

Question 20

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

Accepted Answer

A) True 
 B)False

Exam 26: Securitization Index

Full amortization of a twenty-five-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Most mortgage-backed bond issues conducted by deposit-taking institutions are under-collateralized.

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows.

The underlying NHA MBS 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments. What is the first monthly payment on the Principal Only (PO) strip?

CMHC supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by other government agencies.

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.

Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum. What is the monthly payment on the mortgage pass-through?

When a Special Purpose Vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets.

The securities that form a NHA CMHC pass-through are Treasury bonds, bills, and notes.

One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years. What is the weighted average life of the above mortgage pool?

All else equal, advantages of a DTI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

CMHC will securitize conventional mortgages issued by Canadian deposit-taking institutions.

The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class that it is responsible for securitizing.

The three Canadian government agencies that sponsor the creation of mortgage-backed, pass through securities are: CMHC, FNMA, and CDIC.

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Filters