Deck 20: Mortgage-Backed Securities

Question 1

A mortgage is a loan with _____ as collateral.

A) buildings
B) real estate
C) land
D) property

Answer 1

real estate

Question 2

The entity that initially accepts payments on a mortgage is the mortgage _____ .

A) servicer
B) originator
C) owner
D) processor

Answer 2

servicer

Question 3

The distinguishing characteristic of a convertible mortgage is

A) it can be exchanged for shares of stock.
B) it can be exchanged for a corporate bond.
C) it can be retired early.
D) it can be exchanged for a fixed rate loan.

Answer 3

it can be exchanged for a fixed rate loan.

Question 4

A point is

A) 0.001%.
B) 0.01%.
C) 0.1%.
D) 1.0%

Question 5

Regarding adjustable rate mortgages, all of the following are true except

A) They are also called variable rate mortgages.
B) Their rate usually adjusts monthly.
C) They have an interest rate usually pegged to some other interest rate.
D) About one-fourth of U.S. mortgages are adjustable rate.

Question 6

An adjustable rate mortgage described as 3/1 means

A) the rate is fixed for three years and then resets annually.
B) the rate may not rise by more than 3% nor may it fall by more than 1%.
C) the rate changes by 1% for every 3% the benchmark rate changes.
D) the rate changes by 3% for every 1% the benchmark rate changes.

Question 7

With a graduated payment mortgage,

A) payments decrease over time.
B) payments increase over time.
C) payments remain constant over time.
D) Payments may go up or down over time.

Question 8

With a shared appreciation mortgage,

A) the interest rate is higher than with a fixed rate mortgage.
B) the interest rate is lower than with a fixed rate mortgage.
C) the loan amount is for more than the property value.
D) the maximum term is five years.

Question 9

A $55,000 mortgage at 7.75% over twenty years will have a monthly payment of about

A) $452
B) $476
C) $498
D) $522

Question 10

A $55,000 mortgage at 7.75% over thirty years will have a monthly payment of about

A) $394
B) $476
C) $498
D) $522

Question 11

A $55,000 mortgage at 9.75% over twenty years will have a monthly payment of about

A) $452
B) $476
C) $498
D) $522

Question 12

A $100,000 mortgage at 8.5% over thirty years has a monthly payment of $768.91. A $200,000 mortgage with the same terms would have a monthly payment of

A) considerably less than twice $768.91
B) twice $768.91
C) considerably more than twice $768.91
D) slightly more than twice $768.91

Question 13

A $100,000 mortgage at 8.5% over thirty years has a monthly payment of $768.91. After the borrower makes the twenty-fourth payment the prevailing interest rate on a similar mortgage is now 9.0%. Calculate the value of the remaining cash flows.

A) $94,195
B) $96,177
C) $98,421
D) $100,456

Question 14

A $100,000 mortgage at 8.5% over thirty years has a monthly payment of $768.91. After the borrower makes twenty-three regular payments he makes an additional principal payment with the 24^th payment,sending the bank a total of $1,500. How many more $768.91 payments will be necessary to completelyamortize the mortgage?

A) 314.89
B) 321.29
C) 323.56
D) 327.01

Question 15

A $100,000 mortgage at 8.5% over thirty years has a monthly payment of $768.91. After the borrower makes twenty-three regular payments he makes an additional principal payment with the 24^th payment,sending the bank a total principal and interest payment of $1,500. If there are no additional prepayments,how much less total interest will the borrower pay compared to the original amortization schedule?

A) $4,185
B) $5,300
C) $7,689
D) $13,640

Question 16

A $100,000 mortgage at 8.5% over thirty years has a monthly payment of $768.91. Calculate the remaining balance after the 101^st payment.

A) $34,598
B) $56,812
C) $91,107
D) $93,207

Question 17

A $100,000 mortgage at 8.5% over twenty years has a monthly payment of $867.82. Calculate the remaining balance after the 101^st payment.

A) $76,586
B) $81,045
C) $83,619
D) $88,910

Question 18

From lowest to highest, which of the following is most representative of a mortgage?

A) expected duration, initial duration, initial life, expected life
B) expected duration, expected life, initial duration, initial life
C) initial duration, expected life, expected duration, initial life
D) initial life, expected life, expected duration, initial duration

Question 19

Which of the following would be a characteristic of a $400,000 mortgage?

A) Standard
B) Non-conforming
C) Conforming
D) Non-interest rate sensitive

Question 20

With a modified pass-through, a government agency guarantees

A) principal only
B) interest only
C) principal and interest
D) principal or interest, but not both

Question 21

Tranches are usually associated with

A) collateralized mortgage obligations
B) non-conforming mortgages
C) mortgage backed securities
D) I/O or P/O securities

Question 22

A(n) _____ tranche security would have the least default risk.

A) A
B) B
C) C
D) D

Question 23

Which has the highest duration?

A) The underlying mortgage
B) A principal only security
C) An interest only security
D) An A tranche CMO

Question 24

At 100% PSA, the single monthly mortality rate corresponding to a constant prepayment rate of 7% is

A) 0.005823
B) 0.006029
C) 0.007166
D) 0.008856

Question 25

At 150% PSA, the single monthly mortality rate corresponding to a constant prepayment rate of 7% is

A) 0.005823
B) 0.006029
C) 0.007166
D) 0.009202

Question 26

Which of the following is not a participant in the housing mortgage markets?

A) Ginnie Mae
B) Fannie Mae
C) Sallie Mae
D) Freddie Mac

Question 27

To the interest only investor in stripped mortgages, the most uncertain aspect of the mortgage is

A) the size of the principal payments
B) the risk in the collateral
C) the mortgage's actual life
D) the initial term of the mortgage

Question 28

The mortgage servicer is the individual or institution making mortgage payments.

Question 29

Most adjustable rate mortgages have interest rate adjustments annually.

Question 30

The proper name for a mortgage with semimonthly payments is a biweekly mortgage.

Question 31

You can solve for the monthly payment on a mortgage by using the formula for the present value of an ordinary annuity.

Question 32

Regardless of the term, the principal payments on a $100,000 mortgage will total exactly $100,000 unless the borrower defaults.

Question 33

With mortgage-backed securities, prepayment risk is generally more important than interest rate risk.

Question 34

A pass-through security is a mortgage on which the borrower has failed to make principal and interest payments as agreed.

Question 35

With a sequential pay CMO, there is more interest rate risk with an "A"tranche than with a "D"tranche.

Question 36

The two most important stripped mortgage-backed securities are IOs and POs.

Question 37

Under the 100% PSA assumption, mortgage prepayments in the 50^th month will be 5.0% of the outstanding principal.

Question 38

The single monthly mortality rate is a monthly version of the constant prepayment rate.

Question 39

Credit risk is modest with an agency mortgage-backed security.

Question 40

The holder of an "A"tranche security in a sequential pay CMO benefits from a decline in market interest rates.

Question 41

Prepayment risk is highest with mortgage pools selling near par value.

Question 42

Both interest-only strips and principal-only strips sell for substantial discounts to par value.

Question 43

Declining interest rates benefit the holder of a PO strip.

Question 44

Declining interest rates benefit the holder of an IO strip.

Question 45

The value of an IO strip added to the value of a PO strip should normally be more than the value of the underlying mortgage pool.

Question 46

From the perspective of an IO investor, the sooner the mortgages in a mortgage pool are repaid, the better.

Question 47

From the perspective of a PO investor, the sooner the mortgages in a mortgage pool are repaid, the better.

Question 48

In a sequential pay CMO security, the "A"or first priority tranche would receive principal payments.

Question 49

In a sequential pay CMO security, the final claim tranche has "residual claim"characteristics similar to that of common stock.

Question 50

In a stripped mortgage-backed security, the principal-only security is paid last.

Question 51

Increased down payments, lower interest rates, and longer terms decrease the monthly mortgage payment.

Question 52

Mortgage originators collect monthly payments from borrowers and pursue collection efforts if payments are not received.