Question 1

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 was placed into conservatorship by the federal government in September 2008 as a result of the financial crisis.

Question 2

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

A

Question 3

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 periodic interest payments and are sold at a discount, so their prices are more sensitive to changes in interest rates compared to interest bearing MBBs, which pay regular interest payments.

Question 4

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 5

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

The secondary mortgage market allows mortgage bankers to sell existing mortgages, providing a source of funds for originating new loans. This, in turn, helps to fuel the housing market and financial sector, and provides access to mortgage financing for consumers.

Question 6

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

Accepted Answer

This is correct. A mortgage pass-through security represents a share in a pool of mortgages that are held by a trustee, with each investor receiving a portion of the interest and principal payments made by the individual borrowers.

Question 7

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

To calculate the initial price on the bond, we can use the present value formula:

PV = (C/r) x (1 - (1/(1+r)^n)) + F/(1+r)^n

where PV is the present value or initial price, C is the annual coupon payment, r is the required interest rate or yield to maturity, n is the number of periods or years until maturity, and F is the par value or face value.

Plugging in the given values, we get:

PV = (800/0.12) x (1 - (1/(1+0.12)^25)) + 10000/(1+0.12)^25
PV = 6666.67 x 0.237 + 863.24
PV = 1583.33 + 863.24
PV = $6,863.24

Therefore, the initial price on the bond is $6,863.24, which is closest to answer choice C.

Question 8

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 9

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

Accepted Answer

A rising rate of market interest would decrease the market value of a mortgage pass-through security because it would reduce the present value of the expected cash flows for investors. As interest rates rise, the discount rate used to calculate the present value of those future cash payments increases, leading to a lower present value and a lower market price for the MPT.

Question 10

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 is the process of revaluing a mortgage asset on a regular basis to reflect its current market value, not marketing mortgage pools as bonds to investors.

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 FHLMC, also known as Freddie Mac, was created by Congress in 1970 to provide liquidity for conventional mortgage originators, similar to how FNMA and GNMA provided liquidity for originators of FHA and VA mortgages.

Question 12

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 13

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 14

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

Accepted Answer

This statement correctly describes the standard PSA prepayment curve.

Question 15

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

Accepted Answer

All of the options listed (hazard and title insurance, mortgage default insurance and loan guarantees, and standardized loan underwriting, processing, and servicing) help to mitigate risk for mortgage investors and therefore assure them that they will receive interest and principal payments at little or no risk.

Question 16

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

Accepted Answer

American depositary receipts (ADRs) are not related to mortgages or the housing market. They are actually securities that represent ownership in a foreign company and are traded on U.S. stock exchanges. The other options, mortgage-backed bonds (MBBs), mortgage pass-through securities (MPTs), and collateralized mortgage obligations (CMOs) are all major types of mortgage-related securities.

Question 17

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 18

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

Accepted Answer

A falling rate of market interest would reduce the interest rate of mortgages in the pool, making them more attractive to borrowers. As a result, borrowers would tend to refinance their loans, leading to an increase in prepayments on loans in the pool. This would reduce the outstanding principal balance of the MPT faster than expected, shortening its average life and causing its market value to decline.

Question 19

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

Accepted Answer

Mortgage securities are backed by a pool of mortgage loans, and typically the total value of the underlying loans is greater than the value of the securities sold to investors. This creates an overcollateralization, which provides a layer of protection for investors in case some of the underlying mortgages default. In contrast, corporate bonds are not overcollateralized, as they are backed only by the creditworthiness of the issuing company.

Question 20

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 (Municipal Bond Bond), the price of the bond will decrease below its par value, not increase above it. This is because investors can earn a higher yield by purchasing newly issued bonds with higher coupon rates, causing the demand for lower-coupon bonds to decrease and their prices to fall.

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