Question 1

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 2

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO)mortgage-backed strip security.

Accepted Answer

A) True 
 B)False

Question 3

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

Which of the following statements is true regarding Special Purpose Vehicles (SPVs)and structured investment vehicles (SIVs)?

Accepted Answer

A) An SPV has no contingent credit risk when it sells asset-backed securities (ABSs)with recourse to investors. 
B) An SPV retains the rights to the loans that are used as collateral in an asset-backed security. 
C) An SIV potentially has more liquidity risk than the sponsoring FI due to the short-term nature of the liabilities and their reliance on short-term funds. 
D) An SPV is allowed to accept deposits while the SIV must rely solely on other borrowings. 
A) An SPV has no contingent credit risk when it sells asset-backed securities (ABSs)with recourse to investors. 
B) An SPV retains the rights to the loans that are used as collateral in an asset-backed security. 
C) An SIV potentially has more liquidity risk than the sponsoring FI due to the short-term nature of the liabilities and their reliance on short-term funds. 
D) An SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

On September 7,2008,both FHMA and FHLMC were placed under conservatorship by the

Accepted Answer

A) Federal Reserve. 
B) Federal Housing Finance Agency. 
C) Federal Deposit Insurance Corporation. 
D) Federal Home Loan Bank. 
A) Federal Reserve. 
B) Federal Housing Finance Agency. 
C) Federal Deposit Insurance Corporation. 
D) Federal Home Loan Bank.

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.

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

Question 10

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.

If the entire mortgage pool is repaid after the second month,what is the second month's (liquidating)principal and interest payments?

Accepted Answer

A) $99,933 interest and $14,989,935 principal. 
B) $100,000 interest and $10,065 principal. 
C) $100,000 interest and $15,000,000 principal. 
D) $99,933 principal and $14,989,935 interest. 
A) $99,933 interest and $14,989,935 principal. 
B) $100,000 interest and $10,065 principal. 
C) $100,000 interest and $15,000,000 principal. 
D) $99,933 principal and $14,989,935 interest.

Question 11

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

Question 12

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?

Accepted Answer

A) $37,441 interest and $13,275 principal. 
B) $13,275 principal and $37,441 interest. 
C) $13,312 interest and $4,986,786 principal. 
D) $4,986,786 interest and $37401 interest. 
E) $37,401 interest and $4,986,786 principal. 
A) $37,441 interest and $13,275 principal. 
B) $13,275 principal and $37,441 interest. 
C) $13,312 interest and $4,986,786 principal. 
D) $4,986,786 interest and $37401 interest. 
E) $37,401 interest and $4,986,786 principal.

Question 13

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 is the deposit insurance premium on the demand deposits issued to fund the mortgage?

Accepted Answer

A) $11,756. 
B) $12,778. 
C) $11,500. 
D) $1,150. 
A) $11,756. 
B) $12,778. 
C) $11,500. 
D) $1,150.

Question 14

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 market (present)value of the mortgage pass-through to the investor if the interest rates on this risk category of securities decrease to 7 percent? (Note that investors receive payments net of the 50 basis points servicing fees.)

Accepted Answer

A) $4,892,200. 
B) $5,000,000. 
C) $5,152,189. 
D) $5,477,910. 
A) $4,892,200. 
B) $5,000,000. 
C) $5,152,189. 
D) $5,477,910.

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

What is defined as the sum of the products of the time when principal payments are received and the amount of principal received all divided by total principal outstanding?

Accepted Answer

A) Weighted-average life. 
B) Burn-out factor. 
C) Degree of collateralization. 
D) Option-adjusted spread. 
A) Weighted-average life. 
B) Burn-out factor. 
C) Degree of collateralization. 
D) Option-adjusted spread.

Question 17

Which of the following is not accomplished by securitization of assets?

Accepted Answer

A) Increases the liquidity of assets. 
B) Provides a new source of funds. 
C) Increases the costs of monitoring. 
D) Decreases the duration of assets. 
A) Increases the liquidity of assets. 
B) Provides a new source of funds. 
C) Increases the costs of monitoring. 
D) Decreases the duration of assets.

Question 18

All tranches in a collateralized mortgage obligation (CMO)have the same prepayment risk exposure.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) security creation. 
B) securitization. 
C) loan transfer. 
D) loan collateralization. 
A) security creation. 
B) securitization. 
C) loan transfer. 
D) loan collateralization.

Question 20

Which of the following assets have not been securitized by FIs?

Accepted Answer

A) Mortgages. 
B) Credit card receivables. 
C) Auto loans. 
D) Debts of Lesser Developed Countries (LCD debt). 
A) Mortgages. 
B) Credit card receivables. 
C) Auto loans. 
D) Debts of Lesser Developed Countries (LCD debt).

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

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO)mortgage-backed strip security.

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Which of the following statements is true regarding Special Purpose Vehicles (SPVs)and structured investment vehicles (SIVs)?

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

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

On September 7,2008,both FHMA and FHLMC were placed under conservatorship by the

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?

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.

What is defined as the sum of the products of the time when principal payments are received and the amount of principal received all divided by total principal outstanding?

Which of the following is not accomplished by securitization of assets?

All tranches in a collateralized mortgage obligation (CMO)have the same prepayment risk exposure.

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

Which of the following assets have not been securitized by FIs?

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

Exam 26: Securitization

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

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO)mortgage-backed strip security.

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Which of the following statements is true regarding Special Purpose Vehicles (SPVs)and structured investment vehicles (SIVs)?

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

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

On September 7,2008,both FHMA and FHLMC were placed under conservatorship by the

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?

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.

What is defined as the sum of the products of the time when principal payments are received and the amount of principal received all divided by total principal outstanding?

Which of the following is not accomplished by securitization of assets?

All tranches in a collateralized mortgage obligation (CMO)have the same prepayment risk exposure.

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

Which of the following assets have not been securitized by FIs?

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