Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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  True

Question 3

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  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, 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 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 options 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 options are directly involved.

Question 7

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 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

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.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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).

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 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 13

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 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 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 15

The three government agencies that sponsor the creation of mortgage-backed, pass through securities are: GNMA, FNMA, and FDIC.

Accepted Answer

A) True 
 B)False

Question 16

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 (ABS) 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. 
E) An SIV is not a lucrative or profitable as an SPV. 
A) An SPV has no contingent credit risk when it sells asset-backed securities (ABS) 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. 
E) An SIV is not a lucrative or profitable as an SPV.

Question 17

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 18

GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

Accepted Answer

A) True 
 B)False

Question 19

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) . 
E) must follow the Bank for International Settlements (BIS) capital adequacy standards. 
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) . 
E) must follow the Bank for International Settlements (BIS) capital adequacy standards.

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. 
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 27: Securitization

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

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

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.

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

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

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

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.

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

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

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?

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

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?

The three government agencies that sponsor the creation of mortgage-backed, pass through securities are: GNMA, FNMA, and FDIC.

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

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

GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC.

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

Which of the following are functions of GNMA?

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

Fintech 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