Question 1

One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized."

Accepted Answer

Mortgage securities are backed by pools of mortgages, which are typically overcollateralized, meaning that the total value of the underlying mortgages exceeds the value of the securities issued to investors. This provides an extra layer of protection for investors in case some of the mortgages default. In contrast, corporate bonds are backed by the creditworthiness of the issuing company and do not have collateral backing.

Question 2

A mortgage pass-through security represents an undivided ownership interest in a pool of mortgage held by a trustee.

Accepted Answer

A mortgage pass-through security allows investors to receive a share of the principal and interest payments from a pool of mortgages, reflecting undivided ownership in the pool.

Question 3

When market interest rates exceed the coupon rate of a MBB, the price of the bond will be greater than its par value.

Accepted Answer

When market interest rates exceed the coupon rate of a MBB, the price of the bond will be less than its par value because investors will demand a discount to compensate for the lower coupon rate. This is known as selling at a discount.

Question 4

Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.

Accepted Answer

Marking the mortgage to market refers to the practice of valuing a mortgage asset based on its current market value, rather than its original or face value. This is often done by financial institutions to accurately reflect the value of their mortgage portfolios. It is not related to the process of accumulating mortgage pools and marketing them to investors as mortgage-backed bonds.

Question 5

When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders.

Accepted Answer

In issuing mortgage-backed bonds, the issuer does not transfer ownership of the underlying mortgages to the investors/bondholders; instead, they pool the mortgages and sell securities representing claims against the cash flows or payments generated by the pool.

Question 6

Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.

Accepted Answer

Zero coupon MBBs do not pay regular interest payments, and therefore their prices are more sensitive to changes in interest rates compared to interest bearing MBBs. As interest rates rise, the present value of future cash flows decreases, leading to a decline in the price of zero coupon MBBs.

Question 7

Which of the following developments assure mortgage investors they will receive interest and principal payments at little or no risk?

Accepted Answer

All three developments - the availability of hazard and title insurance, mortgage default insurance and loan guarantees, and standardized loan underwriting, processing, and servicing - contribute to reducing the risk for mortgage investors by providing protection against various types of possible losses. Hazard and title insurance protect against property damage and legal disputes, default insurance and loan guarantees safeguard against borrower defaults, while standardized loan practices improve the consistency and reliability of mortgage investments.

Question 8

Using the same information as the question above, assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond?

Accepted Answer

The answer of Using the same information as the question...

Question 9

The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.

Accepted Answer

This statement is true. The secondary mortgage market allows mortgage bankers to sell existing mortgages to investors, which replenishes their funds and allows them to originate new loans.

Question 10

When a pass-through security investor makes repetitive requests of a mortgagor it is referred to as a nuisance call.

Accepted Answer

A pass-through security investor making repetitive requests of a mortgagor is not referred to as a nuisance call. Pass-through securities are investment vehicles that pool mortgage loans, and the term "nuisance call" typically refers to unwanted or annoying phone calls, not actions taken by investors in mortgage-backed securities.

Question 11

The Federal Home Loan Mortgage Corporation's FHLMC) primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA - VA mortgages.

Accepted Answer

The statement accurately describes the primary purpose of the FHLMC, also known as Freddie Mac.

Question 12

An optional delivery commitment, gives Fannie Mae the right but not the obligation) to purchase mortgage loans from originators.

Accepted Answer

An optional delivery commitment gives the originator (not Fannie Mae) the right, but not the obligation, to sell mortgage loans to Fannie Mae under specified terms.

Question 13

Under the HUD Act of 1968, the assets, liabilities, and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" GNMA).

Accepted Answer

The HUD Act of 1968 actually transferred these aspects to the Government National Mortgage Association (Ginnie Mae), which is a wholly-owned government corporation within the Department of Housing and Urban Development (HUD), not a completely private corporation.

Question 14

The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and 2, then 6% each year thereafter.

Accepted Answer

The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and 2, then 6% each year thereafter.

Question 15

A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. At issue, bond market investors require a 12 percent interest rate on the bond. What is the initial price on the bond?

Accepted Answer

The initial price of the bond is calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity, discounted at the market interest rate of 12%. The calculation results in a price of approximately $6,863.

Question 16

A falling rate of market interest would have which of the following impacts on a mortgage pass-through security?

Accepted Answer

When market interest rates fall, borrowers are more likely to refinance their mortgages to take advantage of lower rates, leading to increased prepayments on loans in the pool. This can increase the prepayment risk for mortgage pass-through securities.

Question 17

A rising rate of market interest would have which of the following impacts on a mortgage pass-through security?

Accepted Answer

As the market interest rate rises, the yield on new securities increases, making existing securities with lower yields less attractive. As a result, the market value of mortgage pass-through securities (MPTs) is likely to fall. As interest rates rise, borrowers are less likely to refinance, which means that cash flow from the underlying mortgage loans will likely decrease as well. This decrease in cash flow is reflected in a lower market value for the MPT.

Question 18

A 10-year maturity mortgage-backed bond is issued. The bond is a zero coupon bond that promises to pay $10,000 par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond?

Accepted Answer

The answer of A 10-year maturity mortgage-backed bond is issued....

Question 19

In 2008, Fannie Mae was spun off in an initial public offering as a private company.

Accepted Answer

Fannie Mae was not spun off in an initial public offering as a private company in 2008. It remained a government-sponsored enterprise until it was placed into conservatorship in September 2008, following the subprime mortgage crisis.

Question 20

Which of the following is NOT a major type of mortgage-related securities?

Accepted Answer

American depositary receipts (ADRs) are not related to mortgages; they are financial instruments used to invest in foreign companies through U.S. stock exchanges.

Quiz 19: The Secondary Mortgage Market: Pass-Through Securities

One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized."

A mortgage pass-through security represents an undivided ownership interest in a pool of mortgage held by a trustee.

When market interest rates exceed the coupon rate of a MBB, the price of the bond will be greater than its par value.

Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.

When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders.

Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.

Which of the following developments assure mortgage investors they will receive interest and principal payments at little or no risk?

Using the same information as the question above, assume that 20 years after the bond is issued, bond market investors require a 15 percent interest rate on the bond. What is the market price of the bond?

The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.

When a pass-through security investor makes repetitive requests of a mortgagor it is referred to as a nuisance call.

The Federal Home Loan Mortgage Corporation's FHLMC) primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA - VA mortgages.

An optional delivery commitment, gives Fannie Mae the right but not the obligation) to purchase mortgage loans from originators.

Under the HUD Act of 1968, the assets, liabilities, and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" GNMA).

The standard PSA prepayment curve assumes prepayments of 2% and 4% in years 1 and 2, then 6% each year thereafter.

A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon. At issue, bond market investors require a 12 percent interest rate on the bond. What is the initial price on the bond?

A falling rate of market interest would have which of the following impacts on a mortgage pass-through security?

A rising rate of market interest would have which of the following impacts on a mortgage pass-through security?

A 10-year maturity mortgage-backed bond is issued. The bond is a zero coupon bond that promises to pay $10,000 par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond?

In 2008, Fannie Mae was spun off in an initial public offering as a private company.

Which of the following is NOT a major type of mortgage-related securities?