Question 1

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 2

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

Accepted Answer

The answer of Which one of the following is a...

Question 3

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

Accepted Answer

Reverse mortgages allow homeowners to borrow against their home's equity without making monthly payments of principal and interest. Instead, the loan must be repaid when the borrower dies, sells the property, or moves out permanently. There is no age limit to qualify for a reverse mortgage, but borrowers must have enough equity in their property to meet lender requirements. The total costs associated with a reverse mortgage can be relatively high due to fees and interest charged over time.

Question 4

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

Accepted Answer

When home mortgage rates decline significantly, it becomes more attractive for homeowners to refinance or prepay their mortgages. This is because they can take advantage of the lower interest rates and save money on their monthly payments or pay off their loans faster. This can create an environment that increases mortgage prepayments. The other options are less likely to have a significant impact on mortgage prepayments.

Question 5

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 6

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 7

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

Accepted Answer

A mortgage passthrough security is a type of asset-backed security that represents a claim on the cash flows from a pool of mortgage loans. As the underlying mortgages are paid off, the cash flows from the passthrough security will vary accordingly. Therefore, the payments on the security will vary depending on the amount paid on the underlying mortgages each period. Choice D correctly describes this characteristic of mortgage passthrough securities.

Question 8

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

Accepted Answer

A prepayment option on a mortgage allows the borrower to make extra payments or pay off the loan before the scheduled maturity date, similarly, a call provision on a corporate bond allows the issuer to redeem the bond before maturity. Option A, B, D, and E are not directly related to the prepayment feature of a mortgage.

Question 9

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

Accepted Answer

PAC support bonds are a type of mortgage-backed security that have a subordinate claim to principal payments, meaning they receive principal payments only after other tranches, such as PAC (Planned Amortization Class) bonds, have been paid.

Question 10

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

In a 30-year fixed-rate mortgage with equal monthly payments, the total amount of interest you pay over the life of the loan will remain the same, but the proportion of interest and principal in each payment will change over time.

At the beginning of the loan, the majority of your monthly payment will go toward interest and only a small portion toward principal. As you continue to make payments, the amount of interest you pay each month will decrease while the amount of principal you pay will increase. This is because the interest is calculated based on the remaining balance of the loan, which decreases as you make payments.

Therefore, the correct answer is B: the amount of interest you pay each month will decrease and the amount of principal you pay each month will increase.

Question 11

Borrowers must pay which one of the following if they are to pay off their home mortgage?

Accepted Answer

Borrowers must pay the remaining principal balance (the amount still owed on the mortgage) plus any accrued interest (the interest that has accumulated since the last payment was made) to pay off their home mortgage. This is the total amount the lender is owed.

Question 12

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

Accepted Answer

A mortgage passthrough bond is backed by a pool of underlying mortgages, making A the correct choice. B is incorrect because both interest and principal payments are typically passed through to investors, not held until maturity. C is incorrect because each bond represents a proportional interest in the pool of mortgages, not one individual mortgage. D is incorrect because there is no such thing as mortgage collaring. E is incorrect because mortgage passthrough bonds are not guaranteed by the U.S. government.

Question 13

Which one of the following is a security that only pays the principal cash flows to investors?

Accepted Answer

A principal-only strip is a security that only pays the principal cash flows to investors. It is created by separating the principal component of a mortgage-backed security from the interest component. The principal-only strip pays investors only the principal repayments made by the underlying mortgages, and does not include any interest payments. This type of security is useful for investors who want to receive the principal repayments in a more predictable manner, without being exposed to the interest rate risk or prepayment risk that affects the value of the corresponding interest-only strip.

Question 14

What are the securities that are created when a mortgage pool is divided into a number of tranches called?

Accepted Answer

Sequential CMOs (Collateralized Mortgage Obligations) are securities created when a mortgage pool is divided into tranches, each with different maturities and risk levels.

Question 15

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 16

Which one of the following set of 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. Additionally, the higher the interest rate, the more interest the borrower will pay. Therefore, the 30-year, 7.0 percent mortgage will cause the borrower to pay the most interest.

Question 17

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

Accepted Answer

Homeowners can typically prepay on their home mortgage at any time, although some mortgages may have prepayment penalties or restrictions. It is important to check the terms of the specific mortgage contract.

Question 18

Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate $175,000 mortgage? (No calculations are required.)

Accepted Answer

The longer the term of the loan, the lower the monthly payment will be. Therefore, the 30-year term will have the lowest monthly payment. The interest rate being fixed at 5.5 percent also favors the 30-year term.

Question 19

Which one of the following is defined as the yield to maturity for a mortgage-backed security computed on an assumed prepayment pattern?

Accepted Answer

Cash flow yield is the yield to maturity for a mortgage-backed security that is computed based on an assumed prepayment pattern.

Question 20

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.How much will the principal balance be after the 90^th payment has been paid?

Accepted Answer

After 90 payments (7.5 years), more than half of the mortgage term has passed, but due to the nature of amortization, the principal balance will still be greater than $75,000.

Quiz 20: Mortgage-Backed Securities

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

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

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

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

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

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

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

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

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

Borrowers must pay which one of the following if they are to pay off their home mortgage?

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

Which one of the following is a security that only pays the principal cash flows to investors?

What are the securities that are created when a mortgage pool is divided into a number of tranches called?

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

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

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

Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate $175,000 mortgage? (No calculations are required.)

Which one of the following is defined as the yield to maturity for a mortgage-backed security computed on an assumed prepayment pattern?

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.How much will the principal balance be after the 90^th payment has been paid?

Quiz 20: Mortgage-Backed Securities

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

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

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

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

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

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

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

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

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

Borrowers must pay which one of the following if they are to pay off their home mortgage?

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

Which one of the following is a security that only pays the principal cash flows to investors?

What are the securities that are created when a mortgage pool is divided into a number of tranches called?

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

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

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

Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate $175,000 mortgage? (No calculations are required.)

Which one of the following is defined as the yield to maturity for a mortgage-backed security computed on an assumed prepayment pattern?

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.How much will the principal balance be after the 90th payment has been paid?

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 .

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.How much will the principal balance be after the 90^th payment has been paid?