Question 1

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 stakeholders 
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 stakeholders 
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. C

Question 2

Costs of securitisation include:

Accepted Answer

A) costs of public/private credit risk insurance and guarantees 
B) costs of over-collateralisation 
C) valuation and packaging costs (the cost of asset heterogeneity) 
D) All of the listed options are correct. 
A) costs of public/private credit risk insurance and guarantees 
B) costs of over-collateralisation 
C) valuation and packaging costs (the cost of asset heterogeneity) 
D) All of the listed options are correct. D

Question 3

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. B

Question 4

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

Question 5

Which of the following is not a factor that may tend to increase loan sales in the future?

Accepted Answer

A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
C) The trend towards marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
D) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell housing loans to decrease their amount of risky assets. 
A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers. 
B) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan. 
C) The trend towards marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell. 
D) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell housing loans to decrease their amount of risky assets.

Question 6

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated.

Accepted Answer

A) True 
 B)False

Question 7

In a loan participation the holder (buyer):

Accepted Answer

A) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
B) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
C) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing 
D) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing 
A) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
B) is a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale 
C) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing 
D) is not a party to the underlying credit agreement, so the initial contract between the loan seller and the borrower remains in place after the sale and the holder (buyer) can vote only on material changes to the loan contract such as changes in interest rate or collateral backing

Question 8

A loan provided by a group of FIs as opposed to a single lender is called:

Accepted Answer

A) a joint loan 
B) project finance 
C) a syndicated loan 
D) a multiple loan 
A) a joint loan 
B) project finance 
C) a syndicated loan 
D) a multiple loan

Question 9

Which of the following statements is true?

Accepted Answer

A) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
B) Zero-coupon corporate bonds are bonds with semi-annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
C) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a small discount from face value. 
D) Zero-coupon corporate bonds are bonds with annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
A) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
B) Zero-coupon corporate bonds are bonds with semi-annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value. 
C) Zero-coupon corporate bonds are bonds without any intervening cash flows between issue and maturity and thus these bonds typically sell at a small discount from face value. 
D) Zero-coupon corporate bonds are bonds with annual cash flows between issue and maturity and thus these bonds typically sell at a large discount from face value.

Question 10

Loan participations are:

Accepted Answer

A) riskier than loan assignments 
B) less risky than loan assignments 
C) always sold without recourse 
D) always sold with partial recourse 
A) riskier than loan assignments 
B) less risky than loan assignments 
C) always sold without recourse 
D) always sold with partial recourse

Question 11

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.

Question 12

The profitability of securitised assets is largely determined by the special purpose vehicle's:

Accepted Answer

A) debt to equity ratio 
B) credit rating 
C) ownership 
D) timing insurance 
A) debt to equity ratio 
B) credit rating 
C) ownership 
D) timing insurance

Question 13

An assumable mortgage is a mortgage contract that allows a change of asset to be mortgaged.

Accepted Answer

A) True 
 B)False

Question 14

Illiquidity is a problem to an FI because while FI:

Accepted Answer

A) liabilities tend to be highly illiquid, its assets usually are not 
B) assets tend to be highly liquid, its liabilities usually are not 
C) liabilities tend to be highly liquid, its assets usually are not 
D) None of the listed options are correct. 
A) liabilities tend to be highly illiquid, its assets usually are not 
B) assets tend to be highly liquid, its liabilities usually are not 
C) liabilities tend to be highly liquid, its assets usually are not 
D) None of the listed options are correct.

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

This propensity to prepay means:

Accepted Answer

A) realised coupons/cash flows on pass-through securities would conform to expected cash flows 
B) realised coupons/cash flows on pass-through securities can often deviate substantially from the stated or expected coupon flows 
C) realised coupons/cash flows on pass-through securities are prepaid 
D) None of the listed options are correct. 
A) realised coupons/cash flows on pass-through securities would conform to expected cash flows 
B) realised coupons/cash flows on pass-through securities can often deviate substantially from the stated or expected coupon flows 
C) realised coupons/cash flows on pass-through securities are prepaid 
D) None of the listed options are correct.

Question 17

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 18

When a special purpose vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets.

Accepted Answer

A) True 
 B)False

Question 19

Loan participations are typically sold to correspondent banks because:

Accepted Answer

A) they are insiders and can be trusted 
B) they offer the best prices 
C) the ongoing relationship offers the greatest monitoring opportunities 
D) this is a regulatory requirement 
A) they are insiders and can be trusted 
B) they offer the best prices 
C) the ongoing relationship offers the greatest monitoring opportunities 
D) this is a regulatory requirement

Question 20

Which of the following is not true of a loan that is sold without recourse?

Accepted Answer

A) The loan is removed from the FI's balance sheet. 
B) The FI has no explicit liability if the loan eventually goes bad. 
C) The FI that originated the loan bears all the credit risk. 
D) The buyer can put the loan back to the selling FI. 
A) The loan is removed from the FI's balance sheet. 
B) The FI has no explicit liability if the loan eventually goes bad. 
C) The FI that originated the loan bears all the credit risk. 
D) The buyer can put the loan back to the selling FI.

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

Costs of securitisation include:

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

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

Which of the following is not a factor that may tend to increase loan sales in the future?

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated.

In a loan participation the holder (buyer):

A loan provided by a group of FIs as opposed to a single lender is called:

Which of the following statements is true?

Loan participations are:

Transferable mortgage is:

The profitability of securitised assets is largely determined by the special purpose vehicle's:

An assumable mortgage is a mortgage contract that allows a change of asset to be mortgaged.

Illiquidity is a problem to an FI because while FI:

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

This propensity to prepay means:

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?

When a special purpose vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets.

Loan participations are typically sold to correspondent banks because:

Which of the following is not true of a loan that is sold without recourse?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks 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 Risks

Capital Management and Adequacy

Filters

Exam 8: Managing Interest Rate Risk Using Securitisation

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

Costs of securitisation include:

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

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

Which of the following is not a factor that may tend to increase loan sales in the future?

When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated.

In a loan participation the holder (buyer):

A loan provided by a group of FIs as opposed to a single lender is called:

Which of the following statements is true?

Loan participations are:

Transferable mortgage is:

The profitability of securitised assets is largely determined by the special purpose vehicle's:

An assumable mortgage is a mortgage contract that allows a change of asset to be mortgaged.

Illiquidity is a problem to an FI because while FI:

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

This propensity to prepay means:

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?

When a special purpose vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets.

Loan participations are typically sold to correspondent banks because:

Which of the following is not true of a loan that is sold without recourse?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks 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 Risks

Capital Management and Adequacy

Filters