Question 1

The Government National Mortgage Association

Accepted Answer

A) is a private corporation owned by shareholders. 
B) purchases pools of mortgages originated by FIs. 
C) provides timing insurance to investors in mortgage-backed securities. 
D) only approves conventional and FHA/VA insured mortgages. 
A) is a private corporation owned by shareholders. 
B) purchases pools of mortgages originated by FIs. 
C) provides timing insurance to investors in mortgage-backed securities. 
D) only approves conventional and FHA/VA insured mortgages.

Question 2

Which of the following best explains the term burn-out factor?

Accepted Answer

A) The percent of mortgage contract that is transferred from the seller to the buyer of a house. 
B) The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account. 
C) The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration. 
D) A mortgage-backed bond issued in multiple classes or tranches. 
A) The percent of mortgage contract that is transferred from the seller to the buyer of a house. 
B) The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account. 
C) The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration. 
D) A mortgage-backed bond issued in multiple classes or tranches.

Question 3

Which of the following good news and bad news effect is NOT true when mortgage interest rates decline,resulting in faster repayments?

Accepted Answer

A) Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect). 
B) Low yields lead to faster prepayment of the mortgage pool's principal (good news effect). 
C) With early prepayments comes fewer interest payments in absolute terms (bad news effect). 
D) Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect). 
E) Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect). 
A) Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect). 
B) Low yields lead to faster prepayment of the mortgage pool's principal (good news effect). 
C) With early prepayments comes fewer interest payments in absolute terms (bad news effect). 
D) Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect). 
E) Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).

Question 4

An interest-only (IO)mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool.

Accepted Answer

A) True 
 B)False

Question 5

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

Accepted Answer

A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip. 
A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip.

Question 6

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 7

GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

Accepted Answer

A) True 
 B)False

Question 8

Historically,FNMA has a secured line of credit with the U.S.Treasury.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true concerning an assumable mortgage?

Accepted Answer

A) The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration. 
B) The mortgage contract is transferred from the seller to the buyer of a house. 
C) The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account. 
D) A mortgage-backed bond issued in multiple classes or tranches. 
A) The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration. 
B) The mortgage contract is transferred from the seller to the buyer of a house. 
C) The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account. 
D) A mortgage-backed bond issued in multiple classes or tranches.

Question 10

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

Accepted Answer

A) True 
 B)False

Question 11

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.

If at the end of the first year,the trustee of the CMO receives total cash flows of $10 million,how are they distributed to Tranche A and B,respectively?

Accepted Answer

A) $5,558,628;$4,441,372. 
B) $4,441,372;$5,558,868. 
C) $4,000,000;$6,000,000. 
D) $6,000,000;$4,000,000. 
A) $5,558,628;$4,441,372. 
B) $4,441,372;$5,558,868. 
C) $4,000,000;$6,000,000. 
D) $6,000,000;$4,000,000.

Question 12

Why do garbage class bonds often have a negative duration?

Accepted Answer

A) The value of the returns in this bond class increases when interest rates increase. 
B) It gives the rights to collateralization. 
C) Bond values fall with interest rate increases. 
D) It gives rights to reinvestment income on the cash flows in the CMO trust. 
A) The value of the returns in this bond class increases when interest rates increase. 
B) It gives the rights to collateralization. 
C) Bond values fall with interest rate increases. 
D) It gives rights to reinvestment income on the cash flows in the CMO trust.

Question 13

A principal-only (PO)mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Accepted Answer

A) True 
 B)False

Question 14

An FI funds a $5 million residential mortgage in 2017 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 of 23 basis points.

What amount of demand deposits are needed to fund the mortgage?

Accepted Answer

A) $5,500,000. 
B) $400,000. 
C) $5,555,555. 
D) $500,000. 
A) $5,500,000. 
B) $400,000. 
C) $5,555,555. 
D) $500,000.

Question 15

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 16

Which of the following is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security?

Accepted Answer

A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of the options. 
A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of the options.

Question 17

Which of the following is the more traditional form of off-balance sheet subsidiary for removing loans from the FIs balance sheet?

Accepted Answer

A) Special Purpose Vehicle (SPV) 
B) Asset-Backed Structure (ABS) 
C) Structured Investment Vehicle (SIV) 
D) Collateralized Mortgage Operation (CMO) 
A) Special Purpose Vehicle (SPV) 
B) Asset-Backed Structure (ABS) 
C) Structured Investment Vehicle (SIV) 
D) Collateralized Mortgage Operation (CMO)

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A) PO strip 
B) IO strip 
C) Class B bonds 
D) Class Z bonds 
A) PO strip 
B) IO strip 
C) Class B bonds 
D) Class Z bonds

Exam 26: Securitization

The Government National Mortgage Association

Which of the following best explains the term burn-out factor?

Which of the following good news and bad news effect is NOT true when mortgage interest rates decline,resulting in faster repayments?

An interest-only (IO)mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool.

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

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

GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance.

Historically,FNMA has a secured line of credit with the U.S.Treasury.

Which of the following is true concerning an assumable mortgage?

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

Why do garbage class bonds often have a negative duration?

A principal-only (PO)mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

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

Which of the following is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security?

Which of the following is the more traditional form of off-balance sheet subsidiary for removing loans from the FIs balance sheet?

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

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

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?

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