Question 1

Mortgage-backed bonds are a form of on-balance-sheet securitization.

Accepted Answer

A) True 
 B)False

Question 2

These bonds 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.

Question 3

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 4

Servicing a pass-through security refers to

Accepted Answer

A) an FI processing of all payments. 
B) an FI provision of clearing services to set up the pass-through. 
C) broker/dealer services provided by the FI to the ultimate holders of the pass-through. 
D) guarantee by the FI of all principal and interest payments. 
E) an FI provision of liquidity services to the ultimate holders of the pass-through. 
A) an FI processing of all payments. 
B) an FI provision of clearing services to set up the pass-through. 
C) broker/dealer services provided by the FI to the ultimate holders of the pass-through. 
D) guarantee by the FI of all principal and interest payments. 
E) an FI provision of liquidity services to the ultimate holders of the pass-through.

Question 5

Which is the oldest mortgage-backed security sponsoring agency?

Accepted Answer

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

Question 6

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. 
E) $12,000 interest and $138,000 principal. 
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. 
E) $12,000 interest and $138,000 principal.

Question 7

An FI funds a $5 million residential mortgage in 2012 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. 
E) $5,000,000. 
A) $5,500,000. 
B) $400,000. 
C) $5,555,555. 
D) $500,000. 
E) $5,000,000.

Question 8

At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 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. 
E) $55,256. 
A) $37,500. 
B) $45,231. 
C) $45,309. 
D) $50,713. 
E) $55,256.

Question 12

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 13

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 14

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 15

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, immediately after origination, interest rates increase to 8.25 percent per annum?

Accepted Answer

A) $15,000,000. 
B) $14,650,591. 
C) $14,000,000. 
D) $15,115,493. 
E) $15,267,549. 
A) $15,000,000. 
B) $14,650,591. 
C) $14,000,000. 
D) $15,115,493. 
E) $15,267,549.

Question 16

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

Question 17

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

Question 18

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. 
E) $4,441,372; $3,632,446. 
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. 
E) $4,441,372; $3,632,446.

Question 19

GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Accepted Answer

A) True 
 B)False

Question 20

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

Accepted Answer

A) True 
 B)False

Exam 26: Securitization

Mortgage-backed bonds are a form of on-balance-sheet securitization.

These bonds 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.

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

Servicing a pass-through security refers to

Which is the oldest mortgage-backed security sponsoring agency?

At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.

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.

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

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?

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

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.

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

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

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?

GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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