Deck 20: The Secondary Mortgage Market: Cmos and Derivative Securities

Question 1

The credit rating of a MPTB depends,to a large extent,on:

A) theamount of overcollateralization.
B) thedegree to which government-related securities constitute the excess collateral.
C) theriskiness of the mortgage in the underlying pools.
D) allof the above.

Answer 1

allof the above.

Question 2

Convexity is a gage for which of the following?

A) profitability
B) return
C) sensitivity
D) duration

Answer 2

sensitivity

Question 3

In comparison to mortgage pass-though securities,CMOs attract a broader class of investors because,by prioritizing cash flows,they can offer more specific maturities.

Answer 3

True

Question 4

Which of the following does not increase the non credit risks in CDOs?

A) Collateral Management risk
B) Certainty in Average life of CDOs tranches
C) Higher correlation and liquidity
D) None of the above

Question 5

Which of the following is FALSE concerning a planned amortization class (PAC)tranche?

A) It has the greatest degree of cash flow certainty.
B) It receive variable payments.
C) Payments are received over predetermined period of time.
D) Payments are received under a range of prepayment scenarios.

Question 6

A CMO does not completely eliminate prepayment risk.

Question 7

A calamity call allows the issuer to recall all securities for a specified time after issue in the event that all but which of the following occurs?

A) Investors want to cash out their positions.
B) Interest rates decline sharply.
C) Prepayments decline sharply.
D) Reinvestment rates are below what was promised to investors.

Question 8

For which of the following investments is the date of maturity known?

A) CMOs
B) MBBs
C) MPTs
D) MPTBs

Question 9

Which of the following investments in NOT a debt obligation of the issuer?

A) CMOs
B) MBBs
C) MPTs
D) MPTBs

Question 10

A mortgage pass-through bond (MPTB)can be described by all of the following except:

A) anMPTB can be viewed as a mortgage-backed bond with the pass-through of principal and prepayment features of a mortgage pass-through security.
B) most MPTBs are based on residential mortgage pools and are generally overcollateralized.
C) anMPTB represents an undivided equity ownership interest in a mortgage pool.
D) allof the above are true.

Question 11

Which of the following is NOT a CMO security type?

A) A repeat floater
B) A Z tranche
C) An inverse floater
D) An IO tranche

Question 12

Duration,as referred to in the chapter,is:

A) ameasure of the extent to which different investments expose an investor to interest rate risk.
B) ameasure of the weighted-average time required before all principal and interest is received on an investment.
C) ameasure that takes into account both the size of cash flows and the timing of their receipt.
D) allof the above.

Question 13

For which of the following investments does the issuer bear prepayment risk?

A) CMOs
B) MBBs
C) MPTs
D) MPTBs

Question 14

The total interest collected from the pool is _________ if prepayment accelerates;therefore the dollar spread between interest inflow and outflow becomes ________.

A) Lower,smaller
B) Lower,wider
C) Higher,smaller
D) Higher,wider

Question 15

The residual position in the CMO offering is considered which kind of position?

A) Primary
B) Equity
C) Interest
D) Debt

Question 16

The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages.

Question 17

The CMO investor assumes the prepayment risk of the underlying mortgages,although the CMO modifies how the risk is allocated.

Question 18

REMICs were created in order to avoid taxes:

A) entirely.
B) atthe investor level.
C) atthe entity level.
D) none of the above.

Question 19

In comparison to the mortgage securities we have previously discussed,the unique characteristic of a CMO is that:

A) theCMO issuer retains the ownership of the underlying mortgage pool.
B) CMOs are issued in multiple security classes.
C) theCMO mortgage pool is not overcollateralized.
D) theCMO is a pay-through in which all amortization and prepayments flow through to investors.

Question 20

Which of the following is NOT characteristic of commercial-backed mortgage securities?

A) The underlying mortgage pool represents a variety of different property types (retail,multifamily,etc. )and a specific geographical area
B) The underlying mortgages have usually been outstanding for several years
C) One of the primary issuers of such securities are insurance companies
D) In general,the underlying mortgage pool for such securities contain fewer mortgages than are included in residential-backed mortgage pools

Question 21

If a premium is paid on a CMO issue (at the time of issue),yields will increase as prepayment rates accelerate.

Question 22

In CMO terminology,planned amortization classes (PACs)are also known as companion tranches.

Question 23

Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs.

Question 24

CDOs often include "B" notes,mezzanine debt and preferred equity as investments

Question 25

CMO investors only pay taxes on interest income.

Question 26

In CDOs both equity and debt holder prefer riskier,higher-yielding collateral to collect excess spreads.

Question 27

CDO managers raises capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments.

Question 28

From the issuer's perspective,the use of MBBs and MPTBs should be viewed as a method of debt financing.