Question 1

GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems.

Accepted Answer

A) True 
 B)False

Question 2

A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT true of an R class CMO issue?

Accepted Answer

A) It is treated as "garbage class." 
B) It is a high-risk investment class. 
C) It gives the investor the rights to the over-collateralization and reinvestment income on the cash flows in the CMO trust. 
D) Returns increase when interest rates increase. 
E) It has a positive duration. 
A) It is treated as "garbage class." 
B) It is a high-risk investment class. 
C) It gives the investor the rights to the over-collateralization and reinvestment income on the cash flows in the CMO trust. 
D) Returns increase when interest rates increase. 
E) It has a positive duration.

Question 4

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. 
E) Comptroller of the Currency. 
A) Federal Reserve. 
B) Federal Housing Finance Agency. 
C) Federal Deposit Insurance Corporation. 
D) Federal Home Loan Bank. 
E) Comptroller of the Currency.

Question 5

The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT

Accepted Answer

A) the tranches will have different coupon rates. 
B) the CMO securities are insured separately from the GNMA pass-through securities. 
C) the principal payments are made totally to the earliest remaining tranche. 
D) GNMA pass-through securities are used as collateral in a trust to support the CMOs. 
E) the CMO securities are split into different tranches or groupings. 
A) the tranches will have different coupon rates. 
B) the CMO securities are insured separately from the GNMA pass-through securities. 
C) the principal payments are made totally to the earliest remaining tranche. 
D) GNMA pass-through securities are used as collateral in a trust to support the CMOs. 
E) the CMO securities are split into different tranches or groupings.

Question 6

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

Accepted Answer

A) The age of the mortgage pool. 
B) Geographic location. 
C) Seasons in the year in which the mortgage was originated. 
D) Full or partial amortization of the payments. 
E) Assumability of mortgages in the pool. 
A) The age of the mortgage pool. 
B) Geographic location. 
C) Seasons in the year in which the mortgage was originated. 
D) Full or partial amortization of the payments. 
E) Assumability of mortgages in the pool.

Question 7

The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market interest rates.

Accepted Answer

A) True 
 B)False

Question 8

Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 11

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 12

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. 
E) Bonds collateralized by a pool of assets. 
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. 
E) Bonds collateralized by a pool of assets.

Question 13

Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities?

Accepted Answer

A) Government National Mortgage Association. 
B) Farmers Home Administration. 
C) Federal National Mortgage Association. 
D) Federal Home Loan Mortgage Corporation. 
E) All of the above are directly involved. 
A) Government National Mortgage Association. 
B) Farmers Home Administration. 
C) Federal National Mortgage Association. 
D) Federal Home Loan Mortgage Corporation. 
E) All of the above are directly involved.

Question 14

An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

Accepted Answer

A) True 
 B)False

Question 15

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 principals outstanding on Tranches A and B, respectively, after the CMO distributes the $10 million of cash flows?

Accepted Answer

A) $50 million; $47 million. 
B) $47 million; $50 million. 
C) $48 million; $48 million. 
D) $50 million; $48 million. 
E) $50 million; $50 million. 
A) $50 million; $47 million. 
B) $47 million; $50 million. 
C) $48 million; $48 million. 
D) $50 million; $48 million. 
E) $50 million; $50 million.

Question 16

Unlike GNMA, FNMA will securitize conventional mortgages issued by depository institutions.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is an incentive to securitize mortgage assets?

Accepted Answer

A) To reduce the regulatory tax burden on the FI. 
B) To adjust the gap exposure of the FI. 
C) To improve the liquidity of the FI. 
D) To generate non-interest sensitive fee income. 
E) All of the above. 
A) To reduce the regulatory tax burden on the FI. 
B) To adjust the gap exposure of the FI. 
C) To improve the liquidity of the FI. 
D) To generate non-interest sensitive fee income. 
E) All of the above.

Question 18

Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail, and the risk that the trustee may mismanage monthly interest and principal payments collected.

Accepted Answer

A) True 
 B)False

Question 19

Which type of loans are securitized most often?

Accepted Answer

A) Residential mortgages. 
B) Credit card loans. 
C) Auto loans. 
D) Student loans. 
E) Commercial and industrial (C&I) loans. 
A) Residential mortgages. 
B) Credit card loans. 
C) Auto loans. 
D) Student loans. 
E) Commercial and industrial (C&I) loans.

Question 20

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).

Exam 26: Securitization

GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems.

A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO).

Which of the following is NOT true of an R class CMO issue?

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

The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market interest rates.

Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold.

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

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 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 is true concerning an assumable mortgage?

Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities?

An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

Unlike GNMA, FNMA will securitize conventional mortgages issued by depository institutions.

Which of the following is an incentive to securitize mortgage assets?

Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail, and the risk that the trustee may mismanage monthly interest and principal payments collected.

Which type of loans are securitized most often?

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

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