Question 1

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 minimum capital requirement on the mortgage in order for the institution to be adequately capitalized?

Accepted Answer

A) $0. 
B) $400,000. 
C) $200,000. 
D) $500,000.

Question 2

When FIs form off-balance sheet subsidiaries to remove assets from their balance sheet,the subsidiary activities

Accepted Answer

A) are regulated as though they are part of the parent institution. 
B) occur beyond the reach of existing state and federal monitoring and regulation. 
C) are monitored and regulated by the Securities and Exchange Commission (SE
C) . 
D) are reported to the National Association of Securities Dealers (NAS
D) .

Question 3

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.

For the first monthly payment,what portion is principal and what portion is interest?

Accepted Answer

A) $100,000 principal and $10,065 interest. 
B) $12,000 interest and no principal. 
C) $100,000 interest and no principal. 
D) $100,000 interest and $10,065 principal.

Question 4

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.

Question 5

FNMA does not hold the mortgages it purchases on its balance sheet,thereby transferring credit and default risk to investors purchasing its securities.

Accepted Answer

A) True 
 B)False

Question 6

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 7

The life span of an SPV (Special Purpose Vehicle)is limited to

Accepted Answer

A) the life of the sponsoring FI. 
B) the duration of its liabilities. 
C) the life of the asset-backed security that it created from the loans in its portfolio. 
D) the life is unlimited as it can exist beyond its initial purpose.

Question 8

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 9

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

Accepted Answer

A) True 
 B)False

Question 10

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly).Assume that there are no prepayments.

What is the first monthly payment on the Interest Only (IO)strip?

Accepted Answer

A) $3,000,000. 
B) $421,928. 
C) $250,000. 
D) $299,775.

Question 11

Why are the regular GNMA pass-through not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?

Accepted Answer

A) Because of their short expected duration. 
B) Because these bonds have the shortest average life with a maximum of prepayment protection. 
C) Because they are zero coupon bonds and hence carry maximum amount of risk. 
D) Because of their failures to offer prepayment protection.

Question 12

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.

Question 13

Mortgage-backed bonds (MBB)differ from pass-through and CMOs in which of the following ways?

Accepted Answer

A) The MBB bondholders have a junior claim to assets of the FI. 
B) There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. 
C) The assets backing a MBB issue are normally removed from the balance sheet of the FI. 
D) Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.

Question 14

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 15

GNMA helps create pass-through asset-backed securities by providing timing insurance.

Accepted Answer

A) True 
 B)False

Question 16

GNMA is a privately-owned entity.

Accepted Answer

A) True 
 B)False

Question 17

Securitization of assets increases the FI's capital requirements.

Accepted Answer

A) True 
 B)False

Question 18

All else equal,advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

Accepted Answer

A) lower regulatory taxes. 
B) increased fee-based income. 
C) increased liquidity. 
D) decreased asset and liability duration mismatch. 
E) increased capital requirements.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following are functions of GNMA?

Accepted Answer

A) Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages. 
B) Sponsors mortgage-backed securities programs by FIs such as banks,thrifts,and mortgage bankers. 
C) Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds. 
D) All of the options. 
E) Sponsors mortgage-backed securities programs by FIs such as banks,thrifts,and mortgage bankers and acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.

Exam 26: Securitization

When FIs form off-balance sheet subsidiaries to remove assets from their balance sheet,the subsidiary activities

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

FNMA does not hold the mortgages it purchases on its balance sheet,thereby transferring credit and default risk to investors purchasing its securities.

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

The life span of an SPV (Special Purpose Vehicle) is limited to

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.

Most mortgage-backed bond issues conducted by depository institutions are under-collateralized.

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly) .Assume that there are no prepayments. What is the first monthly payment on the Interest Only (IO) strip?

Why are the regular GNMA pass-through not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?

Mortgage-backed bonds (MBB) differ from pass-through and CMOs in which of the following ways?

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.

GNMA helps create pass-through asset-backed securities by providing timing insurance.

GNMA is a privately-owned entity.

Securitization of assets increases the FI's capital requirements.

All else equal,advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

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

Which of the following are functions of GNMA?