Question 1

Which one of the following is the type of mortgage pool that guarantees timely payment of interest and principal?

Accepted Answer

A) prepaid 
B) refinanced 
C) secured 
D) fully amortized 
E) fully modified 
A) prepaid 
B) refinanced 
C) secured 
D) fully amortized 
E) fully modified

Question 2

When can a homeowner prepay on his or her home mortgage?

Accepted Answer

A) only on prespecified dates 
B) only during the last five years of the loan period 
C) only if the prepayment pays the mortgage balance in full 
D) at any time 
E) only if the property securing the mortgage is being sold 
A) only on prespecified dates 
B) only during the last five years of the loan period 
C) only if the prepayment pays the mortgage balance in full 
D) at any time 
E) only if the property securing the mortgage is being sold

Question 3

A mortgage-backed security that has only a subordinate claim to principal payments is referred to as which type of bond?

Accepted Answer

A) subsidiary 
B) sequential 
C) PAC support 
D) secondary 
E) subordinate 
A) subsidiary 
B) sequential 
C) PAC support 
D) secondary 
E) subordinate

Question 4

After month 30,assuming that prepayments remain within the PAC collar,the holders of a PAC bond will receive which one of the following payments?

Accepted Answer

A) a fixed principal payment only 
B) a fixed interest payment only 
C) a fixed principal payment plus a declining interest payment 
D) a declining principal payment only 
E) a declining principal payment and a declining interest payment 
A) a fixed principal payment only 
B) a fixed interest payment only 
C) a fixed principal payment plus a declining interest payment 
D) a declining principal payment only 
E) a declining principal payment and a declining interest payment

Question 5

The CPR for an unseasoned 100 PSA mortgage is 4.5 percent.What is the single monthly mortality?

Accepted Answer

A) 0.3557 percent 
B) 0.3635 percent 
C) 0.3752 percent 
D) 0.3830 percent 
E) 0.3986 percent 
A) 0.3557 percent 
B) 0.3635 percent 
C) 0.3752 percent 
D) 0.3830 percent 
E) 0.3986 percent

Question 6

You want to borrow $180,000 at 6.25 percent interest.If you assume a 10-year loan,the monthly payment will be _____ as compared to _____ if you assume a 20-year loan.

Accepted Answer

A) $1,237.50; $1,103.88 
B) $2,207.75; $1,237.50 
C) $2,021.04; $1,315.67 
D) $2,498.18; $1,103.88 
E) $2,498.16; $1,533.50 
A) $1,237.50; $1,103.88 
B) $2,207.75; $1,237.50 
C) $2,021.04; $1,315.67 
D) $2,498.18; $1,103.88 
E) $2,498.16; $1,533.50

Question 7

What are the securities that are created when a mortgage pool is divided into a number of tranches called?

Accepted Answer

A) split strips 
B) divided CMOs 
C) sequential CMOs 
D) indexed mortgage splits 
E) tranche pools 
A) split strips 
B) divided CMOs 
C) sequential CMOs 
D) indexed mortgage splits 
E) tranche pools

Question 8

You are currently borrowing $175,000 to buy a house.The mortgage is for 15 years at 6 percent.How much would you save each month if you could finance this amount at 5 percent for the same time period?

Accepted Answer

A) $84.37 
B) $86.27 
C) $88.95 
D) $90.24 
E) $92.86 
A) $84.37 
B) $86.27 
C) $88.95 
D) $90.24 
E) $92.86

Question 9

If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA,the related interest-only strips will _____ in value and the related principal-only strips will _____ in value.

Accepted Answer

A) decrease; decrease 
B) decrease; increase 
C) increase; decrease 
D) increase; increase 
E) remain constant; remain constant 
A) decrease; decrease 
B) decrease; increase 
C) increase; decrease 
D) increase; increase 
E) remain constant; remain constant

Question 10

The greater the prepayment rate for a mortgage pool,the:

Accepted Answer

A) slower the payments to the holders of the bonds supported by the pool. 
B) greater the decline in the bond principal for bonds supported by the pool. 
C) longer the age of the mortgages held in the underlying pool. 
D) lower the PSA benchmark rate. 
E) greater the default risk. 
A) slower the payments to the holders of the bonds supported by the pool. 
B) greater the decline in the bond principal for bonds supported by the pool. 
C) longer the age of the mortgages held in the underlying pool. 
D) lower the PSA benchmark rate. 
E) greater the default risk.

Question 11

Which one of the following is correct concerning the total payment amount on a PO strip?

Accepted Answer

A) The total payment amount equals the bond's par value. 
B) The total payment amount will either equal or exceed the bond's par value. 
C) The total payment will vary based on the PSA schedule. 
D) The total payment amount will increase if interest rates decline. 
E) The total payment amount will vary if the prepayment rate varies. 
A) The total payment amount equals the bond's par value. 
B) The total payment amount will either equal or exceed the bond's par value. 
C) The total payment will vary based on the PSA schedule. 
D) The total payment amount will increase if interest rates decline. 
E) The total payment amount will vary if the prepayment rate varies.

Question 12

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

Accepted Answer

A) Mortgage bonds are long-term securities while Macaulay duration is a short-term measure. 
B) Macaulay duration assumes the debt has a variable rate and most mortgages have a fixed rate. 
C) Macaulay duration requires bond payments to be made semi-annually. 
D) Macaulay duration assumes payments are fixed and mortgage bond payments vary. 
E) Macaulay duration only applies to zero-coupon bonds. 
A) Mortgage bonds are long-term securities while Macaulay duration is a short-term measure. 
B) Macaulay duration assumes the debt has a variable rate and most mortgages have a fixed rate. 
C) Macaulay duration requires bond payments to be made semi-annually. 
D) Macaulay duration assumes payments are fixed and mortgage bond payments vary. 
E) Macaulay duration only applies to zero-coupon bonds.

Question 13

How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?

Accepted Answer

A) 14.68 years 
B) 18.29 years 
C) 21.33 years 
D) 23.90 years 
E) 25.25 years 
A) 14.68 years 
B) 18.29 years 
C) 21.33 years 
D) 23.90 years 
E) 25.25 years

Question 14

Which one of the following is defined as bonds which represent a claim on the cash flows of an underlying pool of mortgages which flow through to bondholders?

Accepted Answer

A) mortgage bonds 
B) mortgage certificates 
C) mortgage passthroughs 
D) collateralized securities 
E) mortgage collaterals 
A) mortgage bonds 
B) mortgage certificates 
C) mortgage passthroughs 
D) collateralized securities 
E) mortgage collaterals

Question 15

Which one of the following is a security that only pays the principal cash flows to investors?

Accepted Answer

A) split strip 
B) interest-only strip 
C) amortized strip 
D) principal-only strip 
E) final strip 
A) split strip 
B) interest-only strip 
C) amortized strip 
D) principal-only strip 
E) final strip

Question 16

You have decided to pay $1,800 a month on your 30-year,$225,000 mortgage.The interest rate is 7.75 percent.What is your total prepayment amount for year two?

Accepted Answer

A) $2,208 
B) $2,257 
C) $3,387 
D) $3,979 
E) $4,002 
A) $2,208 
B) $2,257 
C) $3,387 
D) $3,979 
E) $4,002

Question 17

The average time it takes for a mortgage in a pool to be paid off is referred to as which one of the following?

Accepted Answer

A) average amortized period 
B) seasoned period 
C) maturity life 
D) average life 
E) normal pool life 
A) average amortized period 
B) seasoned period 
C) maturity life 
D) average life 
E) normal pool life

Question 18

A mortgage pool is divided into A,B,C,and Z-tranches based on the textbook example.Which tranche will have the longest life?

Accepted Answer

A) A-tranche 
B) B-tranche 
C) C-tranche 
D) Z-tranche 
E) All tranches will have equal lives. 
A) A-tranche 
B) B-tranche 
C) C-tranche 
D) Z-tranche 
E) All tranches will have equal lives.

Question 19

A mortgage pool is divided into A,B,C,and Z-tranches as discussed in the textbook.What happens to the initial interest payment for the Z tranche?

Accepted Answer

A) It is immediately passed through to holders of Z tranche securities. 
B) It is accumulated and held until the Z tranche securities mature. 
C) It is exchanged for principal from the A tranche. 
D) It is exchanged for principal from the B tranche. 
E) It is exchanged for principal from the C tranche. 
A) It is immediately passed through to holders of Z tranche securities. 
B) It is accumulated and held until the Z tranche securities mature. 
C) It is exchanged for principal from the A tranche. 
D) It is exchanged for principal from the B tranche. 
E) It is exchanged for principal from the C tranche.

Question 20

Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?

Accepted Answer

A) PSA rating 
B) modified duration 
C) Macaulay duration 
D) effective duration 
E) postponed duration 
A) PSA rating 
B) modified duration 
C) Macaulay duration 
D) effective duration 
E) postponed duration

Which one of the following is the type of mortgage pool that guarantees timely payment of interest and principal?

When can a homeowner prepay on his or her home mortgage?

A mortgage-backed security that has only a subordinate claim to principal payments is referred to as which type of bond?

After month 30,assuming that prepayments remain within the PAC collar,the holders of a PAC bond will receive which one of the following payments?

The CPR for an unseasoned 100 PSA mortgage is 4.5 percent.What is the single monthly mortality?

You want to borrow $180,000 at 6.25 percent interest.If you assume a 10-year loan,the monthly payment will be _ as compared to _ if you assume a 20-year loan.

What are the securities that are created when a mortgage pool is divided into a number of tranches called?

You are currently borrowing $175,000 to buy a house.The mortgage is for 15 years at 6 percent.How much would you save each month if you could finance this amount at 5 percent for the same time period?

If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA,the related interest-only strips will _ in value and the related principal-only strips will _ in value.

The greater the prepayment rate for a mortgage pool,the:

Which one of the following is correct concerning the total payment amount on a PO strip?

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?

Which one of the following is defined as bonds which represent a claim on the cash flows of an underlying pool of mortgages which flow through to bondholders?

Which one of the following is a security that only pays the principal cash flows to investors?

You have decided to pay $1,800 a month on your 30-year,$225,000 mortgage.The interest rate is 7.75 percent.What is your total prepayment amount for year two?

The average time it takes for a mortgage in a pool to be paid off is referred to as which one of the following?

A mortgage pool is divided into A,B,C,and Z-tranches based on the textbook example.Which tranche will have the longest life?

A mortgage pool is divided into A,B,C,and Z-tranches as discussed in the textbook.What happens to the initial interest payment for the Z tranche?

Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Filters

Exam 20: Mortgage-Backed Securities

Which one of the following is the type of mortgage pool that guarantees timely payment of interest and principal?

When can a homeowner prepay on his or her home mortgage?

A mortgage-backed security that has only a subordinate claim to principal payments is referred to as which type of bond?

After month 30,assuming that prepayments remain within the PAC collar,the holders of a PAC bond will receive which one of the following payments?

The CPR for an unseasoned 100 PSA mortgage is 4.5 percent.What is the single monthly mortality?

You want to borrow $180,000 at 6.25 percent interest.If you assume a 10-year loan,the monthly payment will be _____ as compared to _____ if you assume a 20-year loan.

What are the securities that are created when a mortgage pool is divided into a number of tranches called?

You are currently borrowing $175,000 to buy a house.The mortgage is for 15 years at 6 percent.How much would you save each month if you could finance this amount at 5 percent for the same time period?

If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA,the related interest-only strips will _____ in value and the related principal-only strips will _____ in value.

The greater the prepayment rate for a mortgage pool,the:

Which one of the following is correct concerning the total payment amount on a PO strip?

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?

Which one of the following is defined as bonds which represent a claim on the cash flows of an underlying pool of mortgages which flow through to bondholders?

Which one of the following is a security that only pays the principal cash flows to investors?

You have decided to pay $1,800 a month on your 30-year,$225,000 mortgage.The interest rate is 7.75 percent.What is your total prepayment amount for year two?

The average time it takes for a mortgage in a pool to be paid off is referred to as which one of the following?

A mortgage pool is divided into A,B,C,and Z-tranches based on the textbook example.Which tranche will have the longest life?

A mortgage pool is divided into A,B,C,and Z-tranches as discussed in the textbook.What happens to the initial interest payment for the Z tranche?

Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Filters

You want to borrow $180,000 at 6.25 percent interest.If you assume a 10-year loan,the monthly payment will be _ as compared to _ if you assume a 20-year loan.

If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA,the related interest-only strips will _ in value and the related principal-only strips will _ in value.