Question 1

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.
-For the first monthly payment, what are the interest and principal portions of the payment?

Accepted Answer

A) $37,500 principal and $13,213 principal. 
B) $37,500 interest and $13,213 principal. 
C) $37,500 principal and $7,809 interest. 
D) $37,500 interest and $7,809 principal. 
E) $37,500 interest and $17,756 principal.

Question 2

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments.
-What is the first monthly payment on the Interest Only (IO) strip?

Accepted Answer

A) $3,000,000. 
B) $421,928. 
C) $250,000. 
D) $299,775. 
E) $171,928.

Question 3

As of 20, the amount of mortgage-backed securities outstanding was approximately

Accepted Answer

A) $2.9 trillion. 
B) $5.1 trillion. 
C) $7.9 trillion. 
D) $11.0 trillion. 
E) $15.0 trillion.

Question 4

Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

Accepted Answer

A) True 
 B)False

Question 5

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Accepted Answer

A) True 
 B)False

Question 6

Why are the regular GNMA pass-throughs not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?

Accepted Answer

A) Because of their short expected duration. 
B) Because these bonds have the shortest average life with a maximum of prepayment protection. 
C) Because they are zero coupon bonds and hence carry maximum amount of risk. 
D) Because of their failures to offer prepayment protection. 
E) Bondholders receive the promised coupon and principal payments but are not entitled to accrued interest payments.

Question 7

FNMA does not hold the mortgages it purchases on its balance sheet, thereby transferring credit and default risk to investors purchasing its securities.

Accepted Answer

A) True 
 B)False

Question 8

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.

Question 9

The three government agencies that sponsor the creation of mortgage-backed, pass through securities are: GNMA, FNMA, and FDIC.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is a primitive form of asset securitization?

Accepted Answer

A) Loan sales. 
B) Pass-through security. 
C) Collateralized mortgage obligation. 
D) Mortgage-backed bond. 
E) Timing insurance.

Question 11

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.

Question 12

A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

Accepted Answer

A) True 
 B)False

Question 13

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 present value of the mortgage pass-through if the entire pool is repaid after two months and there is no change in interest rates?

Accepted Answer

A) $14,989,935. 
B) $15,089,868. 
C) $15,000,000. 
D) $15,110,065. 
E) $14,889,935.

Question 14

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

Question 15

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.

Question 16

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.

Question 17

In regard to a CMO, which of the following have the shortest average life with a minimum of prepayment protection?

Accepted Answer

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

Question 18

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.

Question 19

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Accepted Answer

A) True 
 B)False

Question 20

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.

Accepted Answer

A) True 
 B)False

Exam 26: Securitization

The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly) . Assume that there are no prepayments. -What is the first monthly payment on the Interest Only (IO) strip?

As of 20, the amount of mortgage-backed securities outstanding was approximately

Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.

A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.

Why are the regular GNMA pass-throughs not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?

FNMA does not hold the mortgages it purchases on its balance sheet, thereby transferring credit and default risk to investors purchasing its securities.

The three government agencies that sponsor the creation of mortgage-backed, pass through securities are: GNMA, FNMA, and FDIC.

Which of the following is a primitive form of asset securitization?

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

A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments.

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

In regard to a CMO, which of the following have the shortest average life with a minimum of prepayment protection?

The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage.

Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved.