Question 1

A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is

Accepted Answer

An IO strip (interest-only strip) represents a claim to the interest payments made by the mortgage holders in a GNMA pool.

Question 2

Servicing a pass-through security refers to

Accepted Answer

Servicing a pass-through security refers to an FI processing of all payments, including principal and interest, on behalf of the investors in the security. This involves collecting payments from the borrower and distributing them to the investors.

Question 3

Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments?

Accepted Answer

When mortgage interest rates decline, resulting in faster repayments, it generally means that any reinvestments would have to be made at the current lower rates, not higher. Therefore, the statement that faster cash flows due to prepayments can be reinvested at higher interest rates is not true.

Question 4

Which of the following is the is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security?

Accepted Answer

All of the listed options are sources of prepayment risk on a typical FNMA mortgage-backed pass-through security.

Question 5

Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse relationship.

Accepted Answer

An IO strip, or an interest-only strip, is an example of a negative duration asset. When interest rates rise, the value of regular bonds decreases, but the value of an IO strip increases. Therefore, including an IO strip in a portfolio of regular bonds can hedge against interest rate risk. Class B, Z, and A bonds do not necessarily have negative duration and may not be effective hedging devices in the same way as an IO strip. A PO strip, or a principal-only strip, is a positive duration asset and would not be effective in hedging against interest rate risk.

Question 6

The Government National Mortgage Association

Accepted Answer

The answer of The Government National Mortgage Association
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Question 7

Which is the oldest mortgage-backed security sponsoring agency?

Accepted Answer

The answer of Which is the oldest mortgage-backed security sponsoring...

Question 8

Which of the following are functions of GNMA?

Accepted Answer

GNMA (Ginnie Mae) sponsors mortgage-backed securities programs and acts as a guarantor for timely payments, but it does not engage in swap transactions.

Question 9

Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways?

Accepted Answer

MBBs differ from pass-throughs and CMOs because there is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB. MBBs are structured with a separate pool of mortgage assets that generate cash flows and those cash flows are used to pay interest and principal on the bonds, but the timing and amounts may not match exactly with mortgage payments due to various factors such as prepayments, defaults, and fees.

Question 10

Which of the following best explains the term burn-out factor?

Accepted Answer

The burn-out factor refers to the aggregate percentage of the mortgage pool that has been prepaid prior to the month under consideration. It is used to calculate the expected future prepayment speeds for mortgage-backed securities.

Question 11

Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?

Accepted Answer

All of the factors listed in the choices occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets.

Question 12

Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is

Accepted Answer

Prepayment risk is unique to mortgage-backed securities because homeowners may pay off their mortgages early, causing the securities to mature earlier than expected and potentially reducing returns for investors. The other risks listed are common to many fixed-income securities.

Question 13

The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT

Accepted Answer

CMO securities are not insured separately from the GNMA pass-through securities. They are secured by the same collateral, which is a pool of mortgages. The other choices are correct. CMO securities are split into different tranches or groupings based on their expected maturity and cash flows, and they have different coupon rates. The principal payments are made to the earliest remaining tranche until it is completely paid off, and then to the next tranche until all tranches are paid off. GNMA pass-through securities are used as collateral in a trust to support the CMOs.

Question 14

Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern?

Accepted Answer

The season in which the mortgage was originated is not a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern. The other factors listed (age of the mortgage pool, geographic location, full or partial amortization of the payments, and assumability of mortgages in the pool) can all impact prepayment behavior.

Question 15

On September 7, 2008, both FHMA and FHLMC were placed under conservatorship by the

Accepted Answer

FHMA and FHLMC were placed under conservatorship by the Federal Housing Finance Agency due to their financial struggles during the housing market crisis.

Question 16

Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities?

Accepted Answer

The Farmers Home Administration (FmHA) is a government agency that primarily provides loans and assistance to farmers and rural residents. They are not directly involved in the creation of mortgage-backed pass-through securities. The other options (GNMA, FNMA, FHLMC) are all government agencies or government-sponsored enterprises that do directly create mortgage-backed pass-through securities.

Question 17

Which of the following is an incentive to securitize mortgage assets?

Accepted Answer

All of the above are incentives to securitize mortgage assets. Securitization can reduce regulatory tax burden, adjust gap exposure, improve liquidity, and generate fee income that is not dependent on interest rates.

Question 18

All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT

Accepted Answer

The other choices all represent advantages of a DI operating as an asset broker in regard to mortgages. However, increased capital requirements would represent a disadvantage as it would require the DI to hold more capital in reserve, potentially limiting its ability to make loans and reducing overall profitability.

Question 19

Which of the following is true concerning an assumable mortgage?

Accepted Answer

An assumable mortgage is one where the buyer of a house can take over the existing mortgage contract from the seller, essentially assuming the terms of the mortgage. This can be advantageous for the buyer if the interest rate of the mortgage is lower than current market rates.

Question 20

What is defined as the sum of the products of the time when principal payments are received and the amount of principal received all divided by total principal outstanding?

Accepted Answer

The definition given in the question is that of weighted-average life, which is commonly used in the analysis of mortgage-backed securities.

Quiz 26: Securitization