In early 1987, stripped mortgage-backed

Exam 23: Mortgage-Backed Securities Market

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Of the mortgage pass-through securities guaranteed by one of the three agencies, only those guaranteed by Ginnie Mae carry the full faith and credit of the U.S. government; nonagency pass-through securities are rated by a commercial rating company, and often they are supported by credit enhancements so that they can obtain a high rating.

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Question 1

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is created by redistributing the cash flow () to the different tranches based on a set of payment rules.

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Question 2

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What does the creation of a CMO accomplish? Briefly explain.

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Question 3

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When the cash flows of pools of mortgage pass-through securities are redistributed to different bond classes, the resulting securities are called agency CMOs. The creation of a CMO cannot eliminate prepayment risk; it can accomplish the distribution of the various forms of this risk among different classes of bondholders. The CMO's major financial innovation is that the securities created more closely satisfy the asset/ liability needs of institutional investors and thus accomplish a broadening of the appeal of mortgage-backed products to traditional bond investors.

The creation of a CMO ________.

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Question 4

Which of the below statements is FALSE?

(Multiple Choice)

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Question 5

A security divides the cash flow from the underlying pool of mortgages on a pro rata basis to the securityholders, while a security is created by altering that distribution of principal and interest from a pro rata distribution to an unequal distribution.

(Multiple Choice)

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Question 6

________ is basically the interest from the collateral that is not being used to satisfy the liabilities (i.e., the interest payments to the tranches in the structure) and the fees (such as mortgage servicing and administrative fees).

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Question 7

What does PSA stand for? How is the PSA prepayment benchmark expressed? What does the PSA benchmark assume?

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Question 8

What is an IO?

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Question 9

In terms of market size, the agency mortgage-backed security market is the ________.

(Multiple Choice)

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Question 10

In regards to the conditional prepayment rate (CPR), which of the below statements is FALSE?

(Multiple Choice)

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Question 11

Market participants often classify subprime mortgage-backed securities as part of the RMBS market and classify agency mortgage-backed securities and private label mortgage-backed securities as part of the market for asset-backed securities.

(True/False)

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Question 12

Securitization has decreased the supply of credit to homeowners and increased the cost of borrowing.

(True/False)

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Question 13

Suppose that an investor owns a pass-through in which the remaining mortgage balance at the beginning of a month is $200 million. Assuming that the CPR is 4.00% and the scheduled principal payment is $2.5 million, what is the estimated prepayment for this month?

(Multiple Choice)

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Question 14

An investor in a mortgage pass-through security is exposed to prepayment risk, which is the same as one type of risk: extension risk.

(True/False)

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Question 15

The stated maturity of a mortgage pass-through security is an appropriate measure of the security's life because of prepayments.

(True/False)

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Question 16

The cash flow of a mortgage pass-through security ________.

(Multiple Choice)

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Question 17

Of all securities that have an investment-grade rating (which includes U.S. Treasury securities), the agency mortgage-backed security market is the largest sector.

(True/False)

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Question 18

Which of the below statements is TRUE?

(Multiple Choice)

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Question 19

The "private label mortgage market" sector includes loans that ________.

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Question 20

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Exam 23: Mortgage-Backed Securities Market

________ is created by redistributing the cash flow (________) to the different tranches based on a set of payment rules.

What does the creation of a CMO accomplish? Briefly explain.

The creation of a CMO ________.

Which of the below statements is FALSE?

A ________ security divides the cash flow from the underlying pool of mortgages on a pro rata basis to the securityholders, while a ________ security is created by altering that distribution of principal and interest from a pro rata distribution to an unequal distribution.

________ is basically the interest from the collateral that is not being used to satisfy the liabilities (i.e., the interest payments to the tranches in the structure) and the fees (such as mortgage servicing and administrative fees).

What does PSA stand for? How is the PSA prepayment benchmark expressed? What does the PSA benchmark assume?

What is an IO?

In terms of market size, the agency mortgage-backed security market is the ________.

In regards to the conditional prepayment rate (CPR), which of the below statements is FALSE?

Market participants often classify subprime mortgage-backed securities as part of the RMBS market and classify agency mortgage-backed securities and private label mortgage-backed securities as part of the market for asset-backed securities.

Securitization has decreased the supply of credit to homeowners and increased the cost of borrowing.

Suppose that an investor owns a pass-through in which the remaining mortgage balance at the beginning of a month is $200 million. Assuming that the CPR is 4.00% and the scheduled principal payment is $2.5 million, what is the estimated prepayment for this month?

An investor in a mortgage pass-through security is exposed to prepayment risk, which is the same as one type of risk: extension risk.

The stated maturity of a mortgage pass-through security is an appropriate measure of the security's life because of prepayments.

The cash flow of a mortgage pass-through security ________.

Of all securities that have an investment-grade rating (which includes U.S. Treasury securities), the agency mortgage-backed security market is the largest sector.

Which of the below statements is TRUE?

The "private label mortgage market" sector includes loans that ________.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

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is created by redistributing the cash flow () to the different tranches based on a set of payment rules.

A security divides the cash flow from the underlying pool of mortgages on a pro rata basis to the securityholders, while a security is created by altering that distribution of principal and interest from a pro rata distribution to an unequal distribution.