Question 1

Which of the following is the is a source of prepayment risk on a typical NHA mortgage-backed pass-through security?

Accepted Answer

A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of these. 
A) Refinancing. 
B) Default risk. 
C) Housing turnover. 
D) Non-assumable mortgages. 
E) All of these.

Question 2

This is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired.

Accepted Answer

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

Question 3

Securitization of assets increases the FI's capital requirements.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is not accomplished by securitization of assets?

Accepted Answer

A) Increases the liquidity of assets. 
B) Provides a new source of funds. 
C) Increases the costs of monitoring. 
D) Decreases the duration of assets. 
E) Decreases the costs of regulation. 
A) Increases the liquidity of assets. 
B) Provides a new source of funds. 
C) Increases the costs of monitoring. 
D) Decreases the duration of assets. 
E) Decreases the costs of regulation.

Question 5

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 6

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 7

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

Accepted Answer

A) True 
 B)False

Question 8

Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is

Accepted Answer

A) prepayment risk 
B) default risk 
C) credit risk 
D) interest rate risk 
E) liquidity risk 
A) prepayment risk 
B) default risk 
C) credit risk 
D) interest rate risk 
E) liquidity risk

Question 9

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 if a 44 basis point servicing fee is deducted monthly?

Accepted Answer

A) $105,499. 
B) $114,700. 
C) $11,340. 
D) $1,055. 
E) $1,277,494. 
A) $105,499. 
B) $114,700. 
C) $11,340. 
D) $1,055. 
E) $1,277,494.

Question 10

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 11

Investors in NHA CMHC 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 12

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 are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal.)

Accepted Answer

A)  $5.5 million on Tranche A and $6.3 million on Tranche B. 
B)  $5.5 million on Tranche B and $6.3 million on Tranche A. 
C)  A total of $12 million on both Tranche A and B. 
D)  $4.5 million on Tranche A and $7.7 million on Tranche B. 
E)  $4.5 million on Tranche B and $7.7 million on Tranche A. 
A)  $5.5 million on Tranche A and $6.3 million on Tranche B. 
B)  $5.5 million on Tranche B and $6.3 million on Tranche A. 
C)  A total of $12 million on both Tranche A and B. 
D)  $4.5 million on Tranche A and $7.7 million on Tranche B. 
E)  $4.5 million on Tranche B and $7.7 million on Tranche A.

Question 13

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 market (present) value of the mortgage pass-through to the investor if the interest rates on this risk category of securities decrease to 7 percent? (Note that investors receive payments net of the 50 basis points servicing fees.)

Accepted Answer

A) $4,892,200. 
B) $5,000,000. 
C) $5,152,189. 
D) $5,477,910. 
E) $5,675,005. 
A) $4,892,200. 
B) $5,000,000. 
C) $5,152,189. 
D) $5,477,910. 
E) $5,675,005.

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

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 16

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

Accepted Answer

A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds. 
A) Class A bonds. 
B) Class B bonds. 
C) Class C bonds. 
D) Class Z bonds. 
E) Class R bonds.

Question 17

CMHC will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

Accepted Answer

A) The age of the mortgage pool. 
B) Geographic location. 
C) Seasons in the year in which the mortgage was originated. 
D) Full or partial amortization of the payments. 
E) Assumability of mortgages in the pool. 
A) The age of the mortgage pool. 
B) Geographic location. 
C) Seasons in the year in which the mortgage was originated. 
D) Full or partial amortization of the payments. 
E) Assumability of mortgages in the pool.

Question 19

On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a U.S. federal government agency.

Accepted Answer

A) True 
 B)False

Question 20

An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a NHA MBS pool.

Accepted Answer

A) True 
 B)False

Exam 26: Securitization Index

Which of the following is the is a source of prepayment risk on a typical NHA mortgage-backed pass-through security?

This is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired.

Securitization of assets increases the FI's capital requirements.

Which of the following is not accomplished by securitization of assets?

Why do garbage class bonds often have a negative duration?

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

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is

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

Investors in NHA CMHC 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.

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.

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.

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

CMHC will sponsor any pool of loans regardless of the size of each individual loan in the pool.

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a U.S. federal government agency.

An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a NHA MBS pool.

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

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

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Filters