Question 1

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

Accepted Answer

A) True 
 B)False  True

Question 2

R class is:

Accepted Answer

A)  an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired. 
B)  the residual class of a CMO, giving 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. 
C)  a bond that has some prepayment protection and expected durations of five to seven years depending on the level of interest rates. 
D)  a bond that has the shortest average life with a minimum of prepayment protection. They are, therefore, of no interest to investors seeking short-duration mortgage-backed assets. 
A)  an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired. 
B)  the residual class of a CMO, giving 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. 
C)  a bond that has some prepayment protection and expected durations of five to seven years depending on the level of interest rates. 
D)  a bond that has the shortest average life with a minimum of prepayment protection. They are, therefore, of no interest to investors seeking short-duration mortgage-backed assets. B

Question 3

Fully amortised means:

Accepted Answer

A)  periodic repayment on a loan that reflects only principal over the life of the loan. 
B)  a repayment on a loan with varying amounts, that reflects part interest and part principal over the life of the loan. 
C)  an equal periodic repayment on a loan that reflects part interest and part principal over the life of the loan. 
D)  None of the listed options are correct. 
A)  periodic repayment on a loan that reflects only principal over the life of the loan. 
B)  a repayment on a loan with varying amounts, that reflects part interest and part principal over the life of the loan. 
C)  an equal periodic repayment on a loan that reflects part interest and part principal over the life of the loan. 
D)  None of the listed options are correct. C

Question 4

Collateralised Debt Obligations (CDOs) were responsible for significant damage and disruption to global financial markets as:

Accepted Answer

A)  investors accepted the recommendations of CDO arrangers and rating agencies. 
B)  many investors were unable to assess the fairness of prices. 
C)  the securities' cash flow was based on cash flows from other financial securities and not the cash flows from real assets. 
D)  the CDOs' cash flows were based on cash flows from real assets and not from other financial securities. 
A)  investors accepted the recommendations of CDO arrangers and rating agencies. 
B)  many investors were unable to assess the fairness of prices. 
C)  the securities' cash flow was based on cash flows from other financial securities and not the cash flows from real assets. 
D)  the CDOs' cash flows were based on cash flows from real assets and not from other financial securities.

Question 5

Mortgage-backed bonds (MBB) differ from pass-throughs and collateralised mortgage obligations (CMOs) in which of the following ways?

Accepted Answer

A)  The MBB bondholders have a junior claim to assets of the FI. 
B)  There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. 
C)  The assets backing a MBB issue are normally removed from the balance sheet of the FI. 
D)  Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue. 
A)  The MBB bondholders have a junior claim to assets of the FI. 
B)  There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. 
C)  The assets backing a MBB issue are normally removed from the balance sheet of the FI. 
D)  Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.

Question 6

In Australia, a securitisation program must have:

Accepted Answer

A)  a specifically created SPV, which is resident in Australia and which is not required to provide data to the Australian Prudential Regulation Authority (APR
A) : 
B)  a specifically created SPV, which may or may not be resident in Australia and which is not required to provide data to the Australian Securities and Investment Commission (ASI
C)  under the Financial Statistics (Collection of Data) Act; 
C)  specifically selected assets (e.g. mortgages, receivables, etc.) backing its liabilities in the form of debt securities. 
D)  a specifically created SPV, which is resident in Australia, which is not required to provide data to the Australian Prudential Regulation Authority and have Specifically selected assets (e.g. mortgages, receivables, etc.) backing its liabilities in the form of debt securities. 
A)  a specifically created SPV, which is resident in Australia and which is not required to provide data to the Australian Prudential Regulation Authority (APR
A) : 
B)  a specifically created SPV, which may or may not be resident in Australia and which is not required to provide data to the Australian Securities and Investment Commission (ASI
C)  under the Financial Statistics (Collection of Data) Act; 
C)  specifically selected assets (e.g. mortgages, receivables, etc.) backing its liabilities in the form of debt securities. 
D)  a specifically created SPV, which is resident in Australia, which is not required to provide data to the Australian Prudential Regulation Authority and have Specifically selected assets (e.g. mortgages, receivables, etc.) backing its liabilities in the form of debt securities.

Question 7

Credit card facilities is a revolving loan product.

Accepted Answer

A) True 
 B)False

Question 8

Choose the correct answer:

Accepted Answer

A)  Regulatory taxes such as reserve requirements create an incentive for banks to remove loans from the balance sheet by selling them without recourse to outside parties. 
B)  Regulatory taxes such as reserve requirements create an incentive for banks to offer low rate mortgages. 
C)  Regulatory taxes such as reserve requirements create an incentive for banks limit their lending to large corporates only. 
D)  None of the listed options are correct. 
A)  Regulatory taxes such as reserve requirements create an incentive for banks to remove loans from the balance sheet by selling them without recourse to outside parties. 
B)  Regulatory taxes such as reserve requirements create an incentive for banks to offer low rate mortgages. 
C)  Regulatory taxes such as reserve requirements create an incentive for banks limit their lending to large corporates only. 
D)  None of the listed options are correct.

Question 9

Timing insurance is a liquidity support provided to the special purpose vehicle to cover mismatches of cash flows:

Accepted Answer

A)  from its accounts receivable and accounts payable to all stake holders. 
B)  from its investment income and current liabilities. 
C)  between the underlying mortgage pool and those required to be paid on the securitised assets. 
D)  None of the listed options are correct. 
A)  from its accounts receivable and accounts payable to all stake holders. 
B)  from its investment income and current liabilities. 
C)  between the underlying mortgage pool and those required to be paid on the securitised assets. 
D)  None of the listed options are correct.

Question 10

A buyer of a loan participation is exposed to:

Accepted Answer

A)  risk exposure to the original borrower defaulting. 
B)  risk exposure to the failure of the selling bank. 
C)  moral hazard problems because the borrower is no longer monitored by the seller. 
D)  risk exposure to the original borrower defaulting and risk exposure to the failure of the selling bank. 
A)  risk exposure to the original borrower defaulting. 
B)  risk exposure to the failure of the selling bank. 
C)  moral hazard problems because the borrower is no longer monitored by the seller. 
D)  risk exposure to the original borrower defaulting and risk exposure to the failure of the selling bank.

Question 11

Burn-out factor is the aggregate percentage of the mortgage pool that:

Accepted Answer

A)  has been prepaid prior to the sale of the loan. 
B)  will be paid after the month under consideration. 
C)  has been prepaid prior to the month under consideration. 
D)  has defaulted. 
A)  has been prepaid prior to the sale of the loan. 
B)  will be paid after the month under consideration. 
C)  has been prepaid prior to the month under consideration. 
D)  has defaulted.

Question 12

Which of the following is true concerning loans sold with recourse?

Accepted Answer

A)  Most loans are sold in this manner. 
B)  The buyer cannot put the loan back to the selling FI. 
C)  The FI has no explicit liability if the loan eventually goes bad. 
D)  The FI that originated the loan retains a contingent credit risk liability. 
A)  Most loans are sold in this manner. 
B)  The buyer cannot put the loan back to the selling FI. 
C)  The FI has no explicit liability if the loan eventually goes bad. 
D)  The FI that originated the loan retains a contingent credit risk liability.

Question 13

What is prepayment risk? How does prepayment risk affect the cash flow stream on a fully amortised mortgage loan? What are the two primary factors that cause early payment?

Accepted Answer

Prepayment is the process of paying prin

Question 14

A bank loan sale occurs when an FI originates a loan and sells the loan with or without recourse to an outside buyer.

Accepted Answer

A) True 
 B)False

Question 15

Securitisation removes assets (such as loans) from the balance sheets of FIs, similar to loan sales.

Accepted Answer

A) True 
 B)False

Question 16

The buyer of a loan participation benefits because the only risk exposure is to the borrower.

Accepted Answer

A) True 
 B)False

Question 17

Z class is:

Accepted Answer

A)  an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired. 
B)  the residual class of a CMO, giving 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. 
C)  a bond that has some prepayment protection and expected durations of five to seven years depending on the level of interest rates. 
D)  a bond that has the shortest average life with a minimum of prepayment protection. They are, therefore, of no interest to investors seeking short-duration mortgage-backed assets. 
A)  an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired. 
B)  the residual class of a CMO, giving 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. 
C)  a bond that has some prepayment protection and expected durations of five to seven years depending on the level of interest rates. 
D)  a bond that has the shortest average life with a minimum of prepayment protection. They are, therefore, of no interest to investors seeking short-duration mortgage-backed assets.

Question 18

Assumable mortgage is a mortgage contract that is:

Accepted Answer

A)  transferred from the seller to the buyer of a house. 
B)  assumed to be paid off. 
C)  transferred from the buyer to the seller of a house. 
D)  non-transferrable. 
A)  transferred from the seller to the buyer of a house. 
B)  assumed to be paid off. 
C)  transferred from the buyer to the seller of a house. 
D)  non-transferrable.

Question 19

Choose the correct answer:

Accepted Answer

A)  While pass-throughs and CMOs remain on banks and building societies balance sheets, mortgage-backed bonds (MBBs) remove mortgages from balance sheets as forms of off-balance-sheet securitisation. 
B)  While pass-throughs and CMOs help banks and building societies remove mortgages from their balance sheets as forms of off-balance-sheet securitisation, mortgage-backed bonds (MBBs) normally remain on the balance sheet. 
C)  Pass-throughs and CMOs are the same as mortgage-backed bonds (MBBs). 
D)  None of the listed options are correct. 
A)  While pass-throughs and CMOs remain on banks and building societies balance sheets, mortgage-backed bonds (MBBs) remove mortgages from balance sheets as forms of off-balance-sheet securitisation. 
B)  While pass-throughs and CMOs help banks and building societies remove mortgages from their balance sheets as forms of off-balance-sheet securitisation, mortgage-backed bonds (MBBs) normally remain on the balance sheet. 
C)  Pass-throughs and CMOs are the same as mortgage-backed bonds (MBBs). 
D)  None of the listed options are correct.

Question 20

Transferable mortgage is:

Accepted Answer

A)  a mortgage contract that allows a change of asset to be sold. 
B)  a mortgage contract that does not allow a change of asset to be mortgaged. 
C)  a mortgage contract that allows a change of asset to be mortgaged. 
D)  None of the listed options are correct. 
A)  a mortgage contract that allows a change of asset to be sold. 
B)  a mortgage contract that does not allow a change of asset to be mortgaged. 
C)  a mortgage contract that allows a change of asset to be mortgaged. 
D)  None of the listed options are correct.

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

R class is:

Fully amortised means:

Collateralised Debt Obligations (CDOs) were responsible for significant damage and disruption to global financial markets as:

Mortgage-backed bonds (MBB) differ from pass-throughs and collateralised mortgage obligations (CMOs) in which of the following ways?

In Australia, a securitisation program must have:

Credit card facilities is a revolving loan product.

Choose the correct answer:

Timing insurance is a liquidity support provided to the special purpose vehicle to cover mismatches of cash flows:

A buyer of a loan participation is exposed to:

Burn-out factor is the aggregate percentage of the mortgage pool that:

Which of the following is true concerning loans sold with recourse?

What is prepayment risk? How does prepayment risk affect the cash flow stream on a fully amortised mortgage loan? What are the two primary factors that cause early payment?

A bank loan sale occurs when an FI originates a loan and sells the loan with or without recourse to an outside buyer.

Securitisation removes assets (such as loans) from the balance sheets of FIs, similar to loan sales.

The buyer of a loan participation benefits because the only risk exposure is to the borrower.

Z class is:

Assumable mortgage is a mortgage contract that is:

Choose the correct answer:

Transferable mortgage is:

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 8: Credit Risk I: Individual Loan Risk

When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.

R class is:

Fully amortised means:

Collateralised Debt Obligations (CDOs) were responsible for significant damage and disruption to global financial markets as:

Mortgage-backed bonds (MBB) differ from pass-throughs and collateralised mortgage obligations (CMOs) in which of the following ways?

In Australia, a securitisation program must have:

Credit card facilities is a revolving loan product.

Choose the correct answer:

Timing insurance is a liquidity support provided to the special purpose vehicle to cover mismatches of cash flows:

A buyer of a loan participation is exposed to:

Burn-out factor is the aggregate percentage of the mortgage pool that:

Which of the following is true concerning loans sold with recourse?

What is prepayment risk? How does prepayment risk affect the cash flow stream on a fully amortised mortgage loan? What are the two primary factors that cause early payment?

A bank loan sale occurs when an FI originates a loan and sells the loan with or without recourse to an outside buyer.

Securitisation removes assets (such as loans) from the balance sheets of FIs, similar to loan sales.

The buyer of a loan participation benefits because the only risk exposure is to the borrower.

Z class is:

Assumable mortgage is a mortgage contract that is:

Choose the correct answer:

Transferable mortgage is:

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters