Exam 26: Securitization Index

An FI operating in the United States funds a US$5 million residential mortgage in 2014 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium to FDIC of 23 basis points. What is the minimum capital requirement on the mortgage in order for the institution to be adequately capitalized?

The weighted-average life of a loan is always greater than the duration of the loan.

Why are the regular NHA MBS pass-throughs not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?

Which of the following is true concerning an assumable mortgage?

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.

The packaging of loans into asset pools and then selling portions of the pool to investors is known as

A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

Why are the class C bonds highly attractive to insurance companies and pension funds?

One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.

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 after the second month, what is the second month's interest and principal payments?

Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

In regard to a CMO, which of the following have the shortest average life with a minimum of prepayment protection?

Investors in a Structured Investment Vehicle (SIV) have no direct right to the cash flows on the underlying portfolio of the SIV.

Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds.

It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.

Which of the following is an incentive to securitize mortgage assets?

The creation and sale of CMOs is based, at least in part, on the ability to segment the market for pass-through security products.