Question 1

Why do garbage class bonds often have a negative duration?

Accepted Answer

A) The value of the returns in this bond class increases when interest rates increase. 
B) It gives the rights to collateralization. 
C) Bond values fall with interest rate increases. 
D) It gives rights to reinvestment income on the cash flows in the CMO trust. 
E) Significant risk premium required by the uninsured depositors. 
A) The value of the returns in this bond class increases when interest rates increase. 
B) It gives the rights to collateralization. 
C) Bond values fall with interest rate increases. 
D) It gives rights to reinvestment income on the cash flows in the CMO trust. 
E) Significant risk premium required by the uninsured depositors.

Question 2

A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is a primitive form of asset securitization?

Accepted Answer

A) Loan sales. 
B) Pass-through security. 
C) Collateralized mortgage obligation. 
D) Mortgage-backed bond. 
E) Timing insurance. 
A) Loan sales. 
B) Pass-through security. 
C) Collateralized mortgage obligation. 
D) Mortgage-backed bond. 
E) Timing insurance.

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. 
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

One difference between a special purpose vehicle (SPV) and a structured investment vehicle (SIV) is

Accepted Answer

A) there is no difference; these are just two different names for the same type of subsidiary. 
B) the SPV has stockholders that share in the profits; the SIV only has debt. 
C) the SIV ceases to exist when the loans in its portfolio cease to exist; the SPV outlives its loan portfolio. 
D) the SPV is allowed to accept deposits while the SIV must rely solely on other borrowings. 
E) the SIV raises funds first and then acquires loans from the sponsoring FI; the SPV receives the loans first and creates an asset-backed security which it sells and transfers the funds back to the sponsoring FI. 
A) there is no difference; these are just two different names for the same type of subsidiary. 
B) the SPV has stockholders that share in the profits; the SIV only has debt. 
C) the SIV ceases to exist when the loans in its portfolio cease to exist; the SPV outlives its loan portfolio. 
D) the SPV is allowed to accept deposits while the SIV must rely solely on other borrowings. 
E) the SIV raises funds first and then acquires loans from the sponsoring FI; the SPV receives the loans first and creates an asset-backed security which it sells and transfers the funds back to the sponsoring FI.

Question 6

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 7

Which of the following are reasons that the actual prepayment rate on a specific mortgage pool backing a specific pass-through security may differ from PSA's assumed pattern?

Accepted Answer

A) age of the mortgage pool and the size of the pool 
B) geographic location and assumability of mortgages in the pool 
C) age and job status of mortgagees in the pool 
D) level of the pool's coupon relative to the current mortgage coupon rate 
E) all of the above are reasons 
A) age of the mortgage pool and the size of the pool 
B) geographic location and assumability of mortgages in the pool 
C) age and job status of mortgagees in the pool 
D) level of the pool's coupon relative to the current mortgage coupon rate 
E) all of the above are reasons

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

Accepted Answer

A) True 
 B)False

Question 11

As of 2015, the amount of mortgage-backed securities outstanding was approximately

Accepted Answer

A) $2.9 trillion. 
B) $5.1 trillion. 
C) $7.8 trillion. 
D) $11.0 trillion. 
E) $15.0 trillion. 
A) $2.9 trillion. 
B) $5.1 trillion. 
C) $7.8 trillion. 
D) $11.0 trillion. 
E) $15.0 trillion.

Question 12

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.

Accepted Answer

A) True 
 B)False

Question 13

Which of these CMO bond issues has characteristics of both a zero-coupon bond and a regular bond?

Accepted Answer

A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) None of the options. 
A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) None of the options.

Question 14

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 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 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 16

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 deposit insurance premium on the demand deposits issued to fund the mortgage?

Accepted Answer

A) $11,756. 
B) $12,778. 
C) $11,500. 
D) $1,150. 
E) $9,200. 
A) $11,756. 
B) $12,778. 
C) $11,500. 
D) $1,150. 
E) $9,200.

Question 17

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 would have been the capital requirements if the FI had securitized the mortgage?

Accepted Answer

A) $0. 
B) $400,000. 
C) $200,000. 
D) $500,000. 
E) $5,000,000. 
A) $0. 
B) $400,000. 
C) $200,000. 
D) $500,000. 
E) $5,000,000.

Question 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 27: Securitization

Why do garbage class bonds often have a negative duration?

A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow.

Which of the following is a primitive form of asset securitization?

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

One difference between a special purpose vehicle (SPV) and a structured investment vehicle (SIV) is

Which of the following are reasons that the actual prepayment rate on a specific mortgage pool backing a specific pass-through security may differ from PSA's assumed pattern?

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

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

Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999.

As of 2015, the amount of mortgage-backed securities outstanding was approximately

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.

Which of these CMO bond issues has characteristics of both a zero-coupon bond and a regular bond?

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?

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

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

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

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