Question 1

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

Accepted Answer

A) Because of their ability to offer perfect prepayment protection. 
B) Because of the shortest average life with a minimum of prepayment protection. 
C) Because of their long expected duration. 
D) Because they are basically zero coupon bonds and hence carry a minimum amount of risk. 
A) Because of their ability to offer perfect prepayment protection. 
B) Because of the shortest average life with a minimum of prepayment protection. 
C) Because of their long expected duration. 
D) Because they are basically zero coupon bonds and hence carry a minimum amount of risk. C

Question 2

The following information is for a collateralized mortgage obligation (CMO).Tranche A has a face value of $110 million and pays 5 percent annually.Tranche B has a face value of $90 million and pays 7 percent annually.

What is the principal outstanding on Tranche A and Tranche B after the end of year payment in the previous question?

Accepted Answer

A) $110 million on Tranche A and $90 million on Tranche B. 
B) $95 million on Tranche A and $90 million on Tranche B. 
C) $106.8 million on Tranche A and $90 million on Tranche B. 
D) $110 million on Tranche A and $86.8 million on Tranche B. 
E) $108.4 million on Tranche A and $88.4 million on Tranche B. 
A) $110 million on Tranche A and $90 million on Tranche B. 
B) $95 million on Tranche A and $90 million on Tranche B. 
C) $106.8 million on Tranche A and $90 million on Tranche B. 
D) $110 million on Tranche A and $86.8 million on Tranche B. 
E) $108.4 million on Tranche A and $88.4 million on Tranche B. C

Question 3

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 monthly payment on the mortgage pass-through?

Accepted Answer

A) $100,000. 
B) $110,065. 
C) $12,000. 
D) $12,000,000. 
A) $100,000. 
B) $110,065. 
C) $12,000. 
D) $12,000,000. B

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

One difference between a Special Purpose Vehicle (SPV)and a Structured Investment Vehicle (SIV)is that the

Accepted Answer

A) SIV can potentially earn an expected spread between its high-yielding assets and the relatively short-term,low cost funds that it borrows in addition to servicing fees. 
B) SPV retains ownership of the loans while the SIV sells the loans without recourse so the loan rights are transferred to the investor. 
C) SPV may have a line of credit or a loan commitment from the sponsoring institution if a loan goes bad and it cannot make payments to investors;the SIV has no such arrangement. 
D) SIV is just passing cash flows it receives through to the ultimate investor;the SPV has fixed payment obligations that must be met regardless of cash flows received on the loan portfolio. 
A) SIV can potentially earn an expected spread between its high-yielding assets and the relatively short-term,low cost funds that it borrows in addition to servicing fees. 
B) SPV retains ownership of the loans while the SIV sells the loans without recourse so the loan rights are transferred to the investor. 
C) SPV may have a line of credit or a loan commitment from the sponsoring institution if a loan goes bad and it cannot make payments to investors;the SIV has no such arrangement. 
D) SIV is just passing cash flows it receives through to the ultimate investor;the SPV has fixed payment obligations that must be met regardless of cash flows received on the loan portfolio.

Question 7

As of 2015,the amount of mortgage-backed securities outstanding was approximately

Accepted Answer

A) $2.9 trillion. 
B) $5.1 trillion. 
C) $7.8 trillion. 
D) $11.0 trillion. 
A) $2.9 trillion. 
B) $5.1 trillion. 
C) $7.8 trillion. 
D) $11.0 trillion.

Question 8

Which of the following is a primitive form of asset securitization?

Accepted Answer

A) Loan sales. 
B) Pass-through security. 
C) Collateralized mortgage obligation. 
D) Mortgage-backed bond. 
A) Loan sales. 
B) Pass-through security. 
C) Collateralized mortgage obligation. 
D) Mortgage-backed bond.

Question 9

The following information is for a collateralized mortgage obligation (CMO).Tranche A has a face value of $110 million and pays 5 percent annually.Tranche B has a face value of $90 million and pays 7 percent annually.

If at the end of the first year,the CMO trustee receives total cash flows of $15 million,how are they distributed?

Accepted Answer

A) $7.5 million to Tranche A and $7.5 million to Tranche B. 
B) $15 million to Tranche A and nothing to Tranche B. 
C) $5.5 million to Tranche A and $9.5 million to Tranche B. 
D) $8.7 million to Tranche A and $6.3 million to Tranche B. 
E) $7.1 million to Tranche A and $7.9 million to Tranche B. 
A) $7.5 million to Tranche A and $7.5 million to Tranche B. 
B) $15 million to Tranche A and nothing to Tranche B. 
C) $5.5 million to Tranche A and $9.5 million to Tranche B. 
D) $8.7 million to Tranche A and $6.3 million to Tranche B. 
E) $7.1 million to Tranche A and $7.9 million to Tranche B.

Question 10

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 received by investors of the mortgage pass-through if the FI deducts a 50 basis points servicing fee?

Accepted Answer

A) $49,237. 
B) $50,713. 
C) $50,459. 
D) $51,200. 
A) $49,237. 
B) $50,713. 
C) $50,459. 
D) $51,200.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 annual payments promised to Tranche A and Tranche B,respectively,assuming no prepayments and non-amortization?

Accepted Answer

A) $3,632,446;$4,000,000. 
B) $4,000,000;$3,000,000. 
C) $3,000,000;$4,000,000. 
D) $3,632,446;$4,441,372. 
A) $3,632,446;$4,000,000. 
B) $4,000,000;$3,000,000. 
C) $3,000,000;$4,000,000. 
D) $3,632,446;$4,441,372.

Question 13

The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.

Accepted Answer

A) True 
 B)False

Question 14

Which is the oldest mortgage-backed security sponsoring agency?

Accepted Answer

A) GNMA. 
B) FNMA. 
C) FHA. 
D) FMHA. 
A) GNMA. 
B) FNMA. 
C) FHA. 
D) FMHA.

Question 15

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

Accepted Answer

A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds. 
A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds.

Question 16

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

Accepted Answer

A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds.

Question 17

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 18

On September 7,2008,FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency.

Accepted Answer

A) True 
 B)False

Question 19

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.

For the first monthly payment,what are the interest and principal portions of the payment?

Accepted Answer

A) $37,500 principal and $13,213 principal. 
B) $37,500 interest and $13,213 principal. 
C) $37,500 principal and $7,809 interest. 
D) $37,500 interest and $7,809 principal. 
A) $37,500 principal and $13,213 principal. 
B) $37,500 interest and $13,213 principal. 
C) $37,500 principal and $7,809 interest. 
D) $37,500 interest and $7,809 principal.

Question 20

These bonds of a CMO have some prepayment protection and expected durations of five to seven years depending on the level of interest rates and are primarily purchased by pension funds and life insurance companies.

Accepted Answer

A) Class A bonds. 
B) Class R bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class B bonds. 
A) Class A bonds. 
B) Class R bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class B bonds.

Exam 26: Securitization

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

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 monthly payment on the mortgage pass-through?

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.

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

One difference between a Special Purpose Vehicle (SPV)and a Structured Investment Vehicle (SIV)is that the

As of 2015,the amount of mortgage-backed securities outstanding was approximately

Which of the following is a primitive form of asset securitization?

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

The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.

Which is the oldest mortgage-backed security sponsoring agency?

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

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

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

On September 7,2008,FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency.

These bonds of a CMO have some prepayment protection and expected durations of five to seven years depending on the level of interest rates and are primarily purchased by pension funds and life insurance companies.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

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