Question 1

GNMA is a privately-owned entity.

Accepted Answer

A) True 
 B)False  False

Question 2

The securities that form a GNMA pass-through are U.S. Treasury bonds, bills, and notes.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following is the 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 above. 
A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of the above. E

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

Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is

Accepted Answer

A) prepayment risk 
B) default risk 
C) credit risk 
D) interest rate risk 
E) liquidity risk 
A) prepayment risk 
B) default risk 
C) credit risk 
D) interest rate risk 
E) liquidity risk

Question 6

All else equal, once a mortgage pool has aged, prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

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.
-What is the weighted average life of the above mortgage pool?

Accepted Answer

A) 30 years. 
B) 2 months. 
C) 1.998 months. 
D) 1 month. 
E) 1.5 months. 
A) 30 years. 
B) 2 months. 
C) 1.998 months. 
D) 1 month. 
E) 1.5 months.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans.

Accepted Answer

A) True 
 B)False

Question 13

Securitization of assets increases the FI's capital requirements.

Accepted Answer

A) True 
 B)False

Question 14

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. 
E) was the first agency to securitize residential 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. 
E) was the first agency to securitize residential mortgages.

Question 15

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

Question 16

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. 
E) $80,000. 
A) $100,000. 
B) $110,065. 
C) $12,000. 
D) $12,000,000. 
E) $80,000.

Question 17

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

Accepted Answer

A) True 
 B)False

Question 18

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

Accepted Answer

A) True 
 B)False

Question 19

A commercial bank operating under an originate-to-distribute model is acting most like

Accepted Answer

A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator. 
E) an investment bank. 
A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator. 
E) an investment bank.

Question 20

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. 
E) $52,100. 
A) $49,237. 
B) $50,713. 
C) $50,459. 
D) $51,200. 
E) $52,100.

Exam 26: Securitization

GNMA is a privately-owned entity.

The securities that form a GNMA pass-through are U.S. Treasury bonds, bills, and notes.

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

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.

Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is

All else equal, once a mortgage pool has aged, prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.

Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.

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

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 weighted average life of the above mortgage pool?

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

FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans.

Securitization of assets increases the FI's capital requirements.

The Government National Mortgage Association

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.

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?

CMOs are typically created from existing GNMA pass-through securities that are held in trust.

One cause of residential mortgage prepayment risk is the sale of the mortgaged property.

A commercial bank operating under an originate-to-distribute model is acting most like

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