Question 1

A claim to the present value of the interest payments made by the mortgage holders in an MBS pool is

Accepted Answer

A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip. 
E) a prepayment claim. 
A) a CARS. 
B) an IO strip. 
C) a CARD. 
D) a PO strip. 
E) a prepayment claim. B

Question 2

A commercial bank operating under an originate-to-distribute model is acting most like

Accepted Answer

A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator. 
E) an investment bank. 
A) an asset transformer. 
B) an asset broker. 
C) a portfolio lender. 
D) an asset accumulator. 
E) an investment bank. B

Question 3

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. A

Question 4

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

Question 5

Deposit-taking institutions have followed and originate-to-distribute model of loan origination only since the financial crisis in 2007.

Accepted Answer

A) True 
 B)False

Question 6

NHA MBS pass-through bondholders can be protected against default risk by CMHC housing insurance.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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. 
E) $10,000 interest and $2,000 principal. 
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. 
E) $10,000 interest and $2,000 principal.

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 following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $110 million and pays 5 percent annually. Tranche B has a face value of $90 million and pays 7 percent annually.
What is the principal outstanding on Tranche A and Tranche B after the end of year payment in the previous question?

Accepted Answer

A)  $110 million on Tranche A and $90 million on Tranche B 
B)  $95 million on Tranche A and $90 million on Tranche B. 
C)  $106.8 million on Tranche A and $90 million on Tranche B. 
D)  $110 million on Tranche A and $86.8 million on Tranche B. 
E)  $108.4 million on Tranche A and $88.4 million on Tranche B. 
A)  $110 million on Tranche A and $90 million on Tranche B 
B)  $95 million on Tranche A and $90 million on Tranche B. 
C)  $106.8 million on Tranche A and $90 million on Tranche B. 
D)  $110 million on Tranche A and $86.8 million on Tranche B. 
E)  $108.4 million on Tranche A and $88.4 million on Tranche B.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

Accepted Answer

A) True 
 B)False

Question 14

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. If at the end of the first year, the trustee of the CMO receives total cash flows of $10 million, how are they distributed to Tranche A and B, respectively?

Accepted Answer

A) $5,558,628; $4,441,372. 
B) $4,441,372; $5,558,868. 
C) $4,000,000; $6,000,000. 
D) $6,000,000; $4,000,000. 
E) $5,558,628; $4,000,000. 
A) $5,558,628; $4,441,372. 
B) $4,441,372; $5,558,868. 
C) $4,000,000; $6,000,000. 
D) $6,000,000; $4,000,000. 
E) $5,558,628; $4,000,000.

Question 15

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 16

An FI operating in the United States funds a US$5 million residential mortgage in 2014 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 to FDIC 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

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Which of the following assets have not been securitized by FIs?

Accepted Answer

A) Mortgages. 
B) Credit card receivables. 
C) Auto loans. 
D) Long-term deposits held at other FIs. 
E) Student loans. 
A) Mortgages. 
B) Credit card receivables. 
C) Auto loans. 
D) Long-term deposits held at other FIs. 
E) Student loans.

Question 20

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Accepted Answer

A) True 
 B)False

Exam 26: Securitization Index

A claim to the present value of the interest payments made by the mortgage holders in an MBS pool is

A commercial bank operating under an originate-to-distribute model is acting most like

Servicing a pass-through security refers to

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

Deposit-taking institutions have followed and originate-to-distribute model of loan origination only since the financial crisis in 2007.

NHA MBS pass-through bondholders can be protected against default risk by CMHC housing insurance.

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

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

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.

The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination.

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?

A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

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.

Which of the following assets have not been securitized by FIs?

Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.

Why Are Financial Institutions Special

Deposit-Taking Institutions

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Mutual Funds, Hedge Funds, and Pension Funds

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Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

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

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