Question 1

You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?

Accepted Answer

As the name suggests, mortgage passthrough securities are securities that pass through the payments received from underlying mortgage borrowers to the investors. Therefore, the payments on these securities will vary depending upon the amount paid on the underlying mortgages each period. Option D is the correct statement.

Question 2

A mortgage-backed security that has only a subordinate claim to scheduled principal payments is referred to as which type of bond?

Accepted Answer

A PAC (Planned Amortization Class) support bond is a type of mortgage-backed security that has a subordinate claim to scheduled principal payments, providing support to the PAC tranches by absorbing prepayment risk.

Question 3

Which one of the following is the key function of GNMA?

Accepted Answer

The key function of GNMA is sponsoring the repackaging of mortgages into mortgage-backed securities pools, also known as Ginnie Mae securities. This provides liquidity and capital to the mortgage market, allowing mortgage lenders to make more loans and ultimately making homeownership more accessible for consumers. GNMA does not provide direct financing for specific groups such as first-time home buyers, military personnel, or farmers.

Question 4

When can a homeowner prepay on his or her home mortgage?

Accepted Answer

Homeowners can prepay on their mortgage at any time without any penalty if their mortgage agreement does not have any prepayment restrictions. Some mortgage agreements may limit the amount and frequency of prepayments, or may charge a penalty for prepaying before certain dates or paying off the mortgage balance in full before the end of the term. However, if there are no restrictions, homeowners can make prepayments whenever they want to reduce their overall interest costs and accelerate their debt repayment.

Question 5

Which one of the following is a mortgage-backed security that has first priority for scheduled principal payments?

Accepted Answer

The protected amortization class (PAC) bond is a mortgage-backed security that has first priority for scheduled principal payments. PAC bonds provide holders with predictable cash flows and protection from prepayment risk.

Question 6

A borrower must pay which one of the following in order to pay off their home mortgage?

Accepted Answer

In order to pay off a home mortgage, the borrower must pay the remaining principal balance plus any accrued interest. This represents the total amount owed and is typically what is required for full repayment of the loan. The other options listed are not accurate representations of the full amount owed and do not consider the interest that has accrued on the loan.

Question 7

Which one of the following is most apt to create an environment that increases mortgage prepayments?

Accepted Answer

When home mortgage rates decline significantly, homeowners are more likely to consider refinancing their mortgages or paying them off early, as it becomes more financially advantageous to do so. This may lead to an increase in mortgage prepayments. The other options are less likely to have a direct impact on mortgage prepayments.

Question 8

Which of the following affect the amount of funds available to a homeowner from a reverse mortgage?
I. current mortgage balance on the home
II. age of homeowner
III. location of the home
IV. appraised value of the home

Accepted Answer

All four factors listed affect the amount of funds available from a reverse mortgage. The current mortgage balance can reduce the available equity, the homeowner's age can influence the loan amount (older homeowners may receive more funds), the location can affect the home's value and thus the loan amount, and the appraised value directly impacts the equity available for a reverse mortgage.

Question 9

Securities that are created when a mortgage pool is divided into a number of tranches are referred to as ________.

Accepted Answer

Sequential CMOs are securities created when a mortgage pool is divided into various tranches, each with different interest rates, maturities, and risk levels. This structure allows for the diversification of risk and the tailoring of investment products to meet specific investor needs.

Question 10

Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate, $175,000 mortgage?

Accepted Answer

The longer the term of the mortgage, the lower the monthly payment. Therefore, the 30-year option will have the lowest monthly payment compared to the other options. However, it is important to note that a longer term means paying more in interest over the life of the loan.

Question 11

A mortgage prepayment is similar to which one of the following features of a corporate bond?

Accepted Answer

A mortgage prepayment allows the borrower to pay off the mortgage before the term of the loan is over, which is similar to a call feature on a corporate bond that allows the issuer to redeem the bonds before their maturity date. Both prepayment and call features give the borrower/issuer the option to pay off the debt earlier than expected.

Question 12

Which one of the following is NOT a reason why mortgage prepayments occur?

Accepted Answer

An increase in interest rates typically discourages mortgage prepayments because homeowners are less likely to refinance to a higher rate, and it does not directly prompt the sale of a home or a refinancing decision for more favorable terms.

Question 13

Mortgage prepayments are generally a(n)________ to the mortgage borrower and a(n)________ to the mortgage investor.

Accepted Answer

Mortgage prepayments can be an advantage to the mortgage borrower as it helps reduce the overall interest paid on the mortgage and speeds up the repayment process. However, for the mortgage investor, prepayments can be a disadvantage as they lose out on potential interest income that could have been earned over the life of the mortgage. Therefore, choice B is the correct answer as it identifies prepayments as both an advantage for the borrower and a disadvantage for the investor.

Question 14

You have a 15-year, fixed-rate, $150,000 mortgage. The monthly payment amount is constant and the mortgage is amortized on a monthly basis. Which of the following best describes how much the principal balance will be after the 90th payment has been made?

Accepted Answer

In an amortized loan, the monthly payment is constant, but the portion of the payment that goes towards interest decreases over time, while the portion that goes towards the principal increases. After 90 payments (7.5 years into a 15-year mortgage), you would have paid off more than half of the interest but less than half of the principal due to the way amortization schedules work. Therefore, the principal balance after the 90th payment would be more than $75,000 but less than the original loan amount.

Question 15

Which one of the following statements correctly relates to reverse mortgages?

Accepted Answer

Reverse mortgages allow homeowners to borrow against the equity in their property without making monthly payments of principal and interest. Instead, the loan balance increases over time and is only paid off when the borrower sells the property or passes away. Borrowers must be at least 62 years old to qualify. The total costs for reverse mortgages can be relatively high, and the loan limits may restrict the amount of equity that can be accessed.

Question 16

Which one of the following is the range defined by the upper and lower prepayment schedules of a PAC bond?

Accepted Answer

The range defined by the upper and lower prepayment schedules of a PAC (Planned Amortization Class) bond is known as the PAC collar. This collar helps to protect the bond from prepayment risk by setting predefined boundaries for how quickly the principal can be repaid.

Question 17

You have a 30-year, fixed-rate mortgage with equal monthly payments. The amount of interest you pay each month will ________ and the amount of principal you pay each month will ________.

Accepted Answer

With a fixed-rate mortgage, the amount of interest you pay each month will decrease over time as you pay down your principal balance. However, the amount of principal you pay each month will increase over time as less of your payment goes towards interest and more goes towards reducing your principal balance. Therefore, the correct answer is B) decrease; increase.

Question 18

The yield to maturity for an ordinary bond corresponds to which of the following, as related to a mortgage-backed security?

Accepted Answer

The yield to maturity for an ordinary bond corresponds to the cash flow yield for a mortgage-backed security. This is because the cash flow yield takes into account the entire cash flow stream of the security, similar to how yield to maturity considers all payments (coupons and principal) for a bond.

Question 19

Which one of the following mortgage terms will cause the borrower to pay the most interest, assuming the mortgage is paid according to the amortization schedule?

Accepted Answer

The longer the term of the mortgage, the more interest the borrower will pay over the life of the loan. Therefore, the 30-year options (both at 6.5% and 7.0%) will result in the borrower paying the most interest.

Question 20

Which one of the following correctly applies to a mortgage passthrough bond?

Accepted Answer

A mortgage passthrough bond's collateral is the underlying pool of mortgages.

Quiz 21: Mortgage-Backed Securities

You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?

A mortgage-backed security that has only a subordinate claim to scheduled principal payments is referred to as which type of bond?

Which one of the following is the key function of GNMA?

When can a homeowner prepay on his or her home mortgage?

Which one of the following is a mortgage-backed security that has first priority for scheduled principal payments?

A borrower must pay which one of the following in order to pay off their home mortgage?

Which one of the following is most apt to create an environment that increases mortgage prepayments?

Which of the following affect the amount of funds available to a homeowner from a reverse mortgage? I. current mortgage balance on the home II. age of homeowner III. location of the home IV. appraised value of the home

Securities that are created when a mortgage pool is divided into a number of tranches are referred to as ________.

Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate, $175,000 mortgage?

A mortgage prepayment is similar to which one of the following features of a corporate bond?

Which one of the following is NOT a reason why mortgage prepayments occur?

Mortgage prepayments are generally a(n) to the mortgage borrower and a(n) to the mortgage investor.

You have a 15-year, fixed-rate, $150,000 mortgage. The monthly payment amount is constant and the mortgage is amortized on a monthly basis. Which of the following best describes how much the principal balance will be after the 90th payment has been made?

Which one of the following statements correctly relates to reverse mortgages?

Which one of the following is the range defined by the upper and lower prepayment schedules of a PAC bond?

You have a 30-year, fixed-rate mortgage with equal monthly payments. The amount of interest you pay each month will and the amount of principal you pay each month will .

The yield to maturity for an ordinary bond corresponds to which of the following, as related to a mortgage-backed security?

Which one of the following mortgage terms will cause the borrower to pay the most interest, assuming the mortgage is paid according to the amortization schedule?

Which one of the following correctly applies to a mortgage passthrough bond?

Quiz 21: Mortgage-Backed Securities

You own a mortgage passthrough. Which one of the following statements correctly describes the payments you will receive on that security?

A mortgage-backed security that has only a subordinate claim to scheduled principal payments is referred to as which type of bond?

Which one of the following is the key function of GNMA?

When can a homeowner prepay on his or her home mortgage?

Which one of the following is a mortgage-backed security that has first priority for scheduled principal payments?

A borrower must pay which one of the following in order to pay off their home mortgage?

Which one of the following is most apt to create an environment that increases mortgage prepayments?

Which of the following affect the amount of funds available to a homeowner from a reverse mortgage? I. current mortgage balance on the home II. age of homeowner III. location of the home IV. appraised value of the home

Securities that are created when a mortgage pool is divided into a number of tranches are referred to as ________.

Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate, $175,000 mortgage?

A mortgage prepayment is similar to which one of the following features of a corporate bond?

Which one of the following is NOT a reason why mortgage prepayments occur?

Mortgage prepayments are generally a(n) ________ to the mortgage borrower and a(n) ________ to the mortgage investor.

You have a 15-year, fixed-rate, $150,000 mortgage. The monthly payment amount is constant and the mortgage is amortized on a monthly basis. Which of the following best describes how much the principal balance will be after the 90th payment has been made?

Which one of the following statements correctly relates to reverse mortgages?

Which one of the following is the range defined by the upper and lower prepayment schedules of a PAC bond?

You have a 30-year, fixed-rate mortgage with equal monthly payments. The amount of interest you pay each month will ________ and the amount of principal you pay each month will ________.

The yield to maturity for an ordinary bond corresponds to which of the following, as related to a mortgage-backed security?

Which one of the following mortgage terms will cause the borrower to pay the most interest, assuming the mortgage is paid according to the amortization schedule?

Which one of the following correctly applies to a mortgage passthrough bond?

Mortgage prepayments are generally a(n) to the mortgage borrower and a(n) to the mortgage investor.

You have a 30-year, fixed-rate mortgage with equal monthly payments. The amount of interest you pay each month will and the amount of principal you pay each month will .