Deck 20: Mortgage-Backed Securities

Question 1

Mortgage-backed securities are defined as securities whose investment returns are based on which one of the following?

A) lease payments from the tenants of financed property
B) interest only on mortgage loans
C) loan refinancings
D) condominium fees
E) pool of mortgages

Answer 1

E

Question 2

The average time it takes for a mortgage in a pool to be paid off is referred to as which one of the following?

A) average amortized period
B) seasoned period
C) maturity life
D) average life
E) normal pool life

Answer 2

D

Question 3

Which one of the following statements correctly applies to an unseasoned mortgage?

A) The mortgage is less than 30 months old.
B) The mortgage is still held by the original mortgage company.
C) The mortgage has at least one term or provision that is uncommon to most mortgages.
D) The mortgage has an adjustable interest rate that has not been adjusted to date.
E) The mortgage was obtained by a first-time home owner.

Answer 3

A

Question 4

Which one of the following is the amount of a mortgage loan outstanding?

A) mortgage remainder
B) mortgage face value
C) mortgage par value
D) mortgage principal
E) mortgage accrual

Question 5

Seasoned mortgages are defined as mortgages that are, or have been, which of the following?

A) prepackaged
B) resold
C) being paid faster than scheduled
D) refinanced
E) over 30 months old

Question 6

Which one of the following is defined as bonds which represent a claim on the cash flows of an underlying pool of mortgages which flow through to bondholders?

A) mortgage bonds
B) mortgage certificates
C) mortgage passthroughs
D) collateralized securities
E) mortgage collaterals

Question 7

Which one of the following is the government agency assigned the responsibility of promoting liquidity in the home mortgage market?

A) FNMA
B) GNMA
C) FHLMC
D) SPIC
E) FDIC

Question 8

Which one of the following is the risk associated with receiving a mortgage bond's principal payments sooner than anticipated?

A) prepayment risk
B) default risk
C) amortized risk
D) market risk
E) seasoned risk

Question 9

FHLMC and FNMA are government-sponsored enterprises charged with which one of the following duties?

A) providing home mortgages directly to homeowners
B) purchasing only defaulted mortgages from banking institutions
C) guaranteeing mortgages with the full faith and credit of the U.S. government
D) providing guarantees equal to GNMA's to the home mortgage market
E) promoting liquidity in the home mortgage market

Question 10

Which one of the following is the measure of interest rate risk for fixed-income securities?

A) standard deviation
B) Macaulay duration
C) variance
D) Jensen's alpha
E) beta

Question 11

What are the securities which are created by splitting the cash flows from mortgage pools according to specific allocation rules called?

A) collateralized mortgage obligations
B) collateralized housing bonds
C) mortgage amortized strips
D) pooled mortgage obligations
E) secured mortgage strips

Question 12

Which one of the following is the prepayment rate for a mortgage pool which is dependent upon the age of the mortgages comprising the pool?

A) unseasoned rate
B) average life rate
C) aged payment rate
D) conditional prepayment rate
E) amortized rate

Question 13

Which one of the following is the type of mortgage pool that guarantees timely payment of interest and principal?

A) prepaid
B) refinanced
C) secured
D) fully amortized
E) fully modified

Question 14

Mortgage prepayments are best defined by which one of the following?

A) reducing the mortgage according to a schedule over the life of the mortgage
B) paying a monthly mortgage payment before the regular due date
C) paying off the principal faster than required by the amortization schedule
D) paying a cash deposit when purchasing a property
E) paying each mortgage payment as scheduled

Question 15

What is the probability that a mortgage will be prepaid during a given year called?

A) mortgage reduction rate
B) amortization rate
C) filtration rate
D) prepayment rate
E) postponement rate

Question 16

Which one of the following terms applies to the process of reducing the mortgage principal over the life of the mortgage according to a schedule?

A) mortgage amortization
B) mortgage prepayment
C) mortgage elimination
D) mortgage securitization
E) mortgage passthrough

Question 17

Which one of the following terms is applied to the process of creating mortgage-backed securities from a pool of mortgages?

A) mortgage aggregation
B) mortgage securitization
C) mortgage bundling
D) mortgage pooling
E) mortgage financing

Question 18

Interest-only strips are securities that do which one of the following?

A) pay interest only at maturity
B) pay only the interest cash flows to investors
C) pay interest over the life of the security and the entire principal at maturity
D) pay interest only when requested by the holder with all remaining amounts paid at maturity
E) pay interest monthly and principal quarterly

Question 19

When a borrower pays a fixed monthly amount on his or her home mortgage based on a fixed rate of interest, he or she has which type of mortgage?

A) prepayment-based
B) open-end
C) fixed-rate
D) variable-rate
E) floating-rate

Question 20

The _____ duration for mortgage-backed securities is the duration measure that accounts for how mortgage prepayments are affected by changes in interest rates.

A) mean
B) modified
C) average
D) effective
E) adjusted

Question 21

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?

A) 10-year, 6.5 percent
B) 10-year, 7.0 percent
C) 15-year, 7.0 percent
D) 30-year, 6.5 percent
E) 30-year, 7.0 percent

Question 22

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

A) The loans allow homeowners to build equity in their property.
B) The total costs associated with the loans are relatively low.
C) Borrowers only qualify if they are 65 years of age or older.
D) Homeowner's make monthly payments of principal and interest.
E) No payments are required from the borrower as long as the borrower lives in the mortgaged property.

Question 23

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

A) only on prespecified dates
B) only during the last five years of the loan period
C) only if the prepayment pays the mortgage balance in full
D) at any time
E) only if the property securing the mortgage is being sold

Question 24

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?

A) zero
B) < $75,000
C) $75,000
D) > $75,000
E) cannot be determined from the information provided

Question 25

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

A) 10-year, 5.5 percent
B) 10-year, 6.0 percent
C) 15-year, 5.5 percent
D) 15-year, 6.0 percent
E) 30-year, 5.5 percent

Question 26

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

A) The primary collateral for the bond is the underlying pool of mortgages.
B) All interest received is immediately passed through while principal payments are held until the bond matures.
C) Each bond represents one home mortgage.
D) These bonds are created via a process known as mortgage collaring.
E) All of these bonds are guaranteed by the full faith and credit of the U.S. government.

Question 27

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

A) The payments will decrease at a constant rate over the life of the security.
B) The payments will increase at a decreasing rate over the life of the security.
C) The payments will be fixed for the life of the security.
D) The payments will vary depending upon the amount paid on the underlying mortgages each period.
E) The payments will decrease based on the interest shown on the amortization schedule.

Question 28

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

A) PAC collar
B) PAC range
C) PAC space
D) PAC cup
E) PAC field

Question 29

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

A) split strip
B) interest-only strip
C) amortized strip
D) principal-only strip
E) final strip

Question 30

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

A) house securing the mortgage is sold
B) increase in interest rates
C) homeowner's spouse dies
D) homeowner faces job transfer
E) home is refinanced

Question 31

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 ____.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
E) remain constant; remain constant

Question 32

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

A) collateral provision
B) put provision
C) call provision
D) conversion provision
E) protective covenants provision

Question 33

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

A) I and IV only
B) II and III only
C) I, II, and IV only
D) I, III, and IV only
E) I, II, III, and IV

Question 34

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

A) payment yield
B) assumed yield
C) current yield
D) cash flow yield
E) amortized yield

Question 35

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

A) advantage; advantage
B) advantage; disadvantage
C) disadvantage; advantage
D) disadvantage; disadvantage
E) advantage; neutral event

Question 36

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

A) remaining principal balance plus any accrued interest
B) present value of all future payments discounted at the current market rate
C) all remaining payments in full
D) remaining principal balance plus one year's interest
E) present value of the remaining principal balance

Question 37

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

A) home mortgage rates remain relatively steady
B) home mortgage rates decline significantly
C) number of homeowner's defaulting on their mortgages rises
D) homeowner's have steady, secure employment at their current jobs
E) number of employees being transferred for employment purposes declines

Question 38

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

A) split strips
B) divided CMOs
C) sequential CMOs
D) indexed mortgage splits
E) tranche pools

Question 39

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

A) subsidiary
B) sequential
C) PAC support
D) secondary
E) subordinate

Question 40

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

A) priority strip bond
B) principal strip
C) amortized principal strip
D) protected amortization class bond
E) principal priority tranche

Question 41

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

A) Mortgage bonds are long-term securities while Macaulay duration is a short-term measure.
B) Macaulay duration assumes the debt has a variable rate and most mortgages have a fixed rate.
C) Macaulay duration requires bond payments to be made semi-annually.
D) Macaulay duration assumes payments are fixed and mortgage bond payments vary.
E) Macaulay duration only applies to zero-coupon bonds.

Question 42

Which one of the following is correct concerning the total payment amount on a PO strip?

A) The total payment amount equals the bond's par value.
B) The total payment amount will either equal or exceed the bond's par value.
C) The total payment will vary based on the PSA schedule.
D) The total payment amount will increase if interest rates decline.
E) The total payment amount will vary if the prepayment rate varies.

Question 43

A mortgage pool was created six years ago. Which one of the following PSA values is most apt to apply to that pool if market mortgage rates have been declining quite rapidly over the past five years?

A) 0
B) 50
C) 100
D) 150
E) 200

Question 44

You just purchased a GNMA mortgage-backed security. Which one of the following should you expect to receive?

A) fixed monthly payments
B) fixed quarterly payments
C) variable monthly payments
D) variable quarterly payments
E) quarterly payments that decrease at a constant rate

Question 45

Historically, what has been the relationship between bond prepayment rates and the market rate of interest?

A) perfectly related
B) directly related
C) inversely related
D) minimally related
E) unrelated

Question 46

The greater the prepayment rate for a mortgage pool, the:

A) slower the payments to the holders of the bonds supported by the pool.
B) greater the decline in the bond principal for bonds supported by the pool.
C) longer the age of the mortgages held in the underlying pool.
D) lower the PSA benchmark rate.
E) greater the default risk.

Question 47

Which one of the following statements correctly relates to GNMA securities?

A) The primary risk associated with GNMAs is default risk.
B) The minimal denomination of a GNMA when issued is $10,000.
C) GNMA mortgages are guaranteed solely by the FHA.
D) GNMAs were originally established as an agency within the Department of Veteran's Affairs.
E) If you buy a GNMA you are accepting the risk of prepayment.

Question 48

After 30 months, what is the 100 PSA benchmark conditional prepayment rate per year?

A) 3 percent
B) 5 percent
C) 6 percent
D) 8 percent
E) 12 percent

Question 49

How much faster will a mortgage pool with a PSA of 150 be prepaid as compared to the benchmark?

A) 150 times faster
B) 15 times faster
C) 1.5 times faster
D) 1.5 times slower
E) 15 times slower

Question 50

How long is the expected average mortgage life of a mortgage held in a 30-year mortgage pool with a 100 PSA?

A) 14.68 years
B) 18.29 years
C) 21.33 years
D) 23.90 years
E) 25.25 years

Question 51

If the prepayment schedule for a mortgage pool increases to 100 PSA from 50 PSA, the related interest-only strips will _____ in value and the related principal-only strips will _____ in value.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
E) remain constant; remain constant

Question 52

Generally, the average life of a mortgage is _____ the mortgage's stated maturity.

A) much less than
B) marginally less than
C) equal to
D) marginally greater than
E) significantly greater than

Question 53

Which of the following affect the value of a PO strip based on a GNMA bond?
I) changes in the PSA schedule
II) prepayment rates
III) time value of money
IV) changes in the default rates for the underlying mortgages

A) I and II only
B) II and III only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV

Question 54

Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?

A) PSA rating
B) modified duration
C) Macaulay duration
D) effective duration
E) postponed duration

Question 55

Monthly payments to investors in GNMA mortgage-backed bonds include which of the following cash flows?
I) mortgage interest
II) fixed principal payment
III) scheduled amortization of mortgage principal
IV) mortgage prepayments

A) II only
B) I and II only
C) I, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Question 56

GNMA mortgage pools are based on mortgages issued by which of the following?
I) FHLMC
II) FNMA
III) FHA
IV) FmHA

A) I and II only
B) II and III only
C) III and IV only
D) I, II, and IV only
E) I, II, III, and IV

Question 57

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

A) providing direct financing for first-time home buyers only
B) directly refinancing existing home mortgages
C) providing mortgage funds to military personnel only
D) providing direct financing to first-time home buyers, military personnel, and farmers
E) sponsoring the repackaging of mortgages into mortgage-backed securities pools

Question 58

Which one of the following is a government agency?

A) FHLMC
B) Fannie Mae
C) Freddie Mac
D) GNMA
E) FNMA

Question 59

You acquired a 30-year mortgage two years ago to purchase your current residence. Your mortgage is classified as which one of the following?

A) seasoned
B) unseasoned
C) conditional
D) complex
E) deferred

Question 60

Which one of the following statements regarding an original issue $25,000 GNMA bond is correct?

A) The investor will receive $25,000 as a principal payment at maturity.
B) The investor will receive fixed quarterly interest payments.
C) The investor will receive the future value of $25,000 at maturity.
D) The investor will receive payments totaling $25,000 over the life of the bond.
E) The investor should receive more than $25,000 but the amount of each payment is unknown in advance.

Question 61

The value of an IO strip will most likely increase when:

A) the PSA schedule rate decreases from 200 to 100.
B) market interest rates remain constant.
C) prepayments increase.
D) mortgage refinancings increase.
E) market interest rates decrease significantly.

Question 62

PAC bondholders receive payments of principal based on which one of the following?

A) an amortization schedule
B) PAC collar's lower PSA prepayment schedule
C) PAC collar's upper PSA prepayment schedule
D) receipt of all principal collected on the underlying pool of mortgages until the bond is paid in full
E) zero principal from the underlying pool of mortgages until after the PAC companion bonds have been paid in full

Question 63

You are borrowing $240,000 for 30 years at 7.5 percent. Payments will be made monthly. What is the total amount of interest you will pay if you pay the loan as agreed over the 30 years?

A) $314,640
B) $324,340
C) $346,360
D) $364,120
E) $396,342

Question 64

After month 30, assuming that prepayments remain within the PAC collar, the holders of a PAC bond will receive which one of the following payments?

A) a fixed principal payment only
B) a fixed interest payment only
C) a fixed principal payment plus a declining interest payment
D) a declining principal payment only
E) a declining principal payment and a declining interest payment

Question 65

Assume that a mortgage pool follows a specified PSA prepayment schedule. Given this, the cash flow yield on the mortgage pool will do which one of the following?

A) equal the average interest rate of the mortgages contained in the pool
B) equal the anticipated cash flow for the next year divided by the current value of the pool
C) equate the present value of the future cash flows from the pool to the current value of the pool
D) equate the average interest rate on the mortgages to the current market rate of interest
E) equal the current market rate of interest

Question 66

You want to borrow $180,000 at 6.25 percent interest. If you assume a 10-year loan, the monthly payment will be _____ as compared to _____ if you assume a 20-year loan.

A) $1,237.50; $1,103.88
B) $2,207.75; $1,237.50
C) $2,021.04; $1315.67
D) $2,498.18; $1,103.88
E) $2,498.16; $1,533.50

Question 67

You took out a 15-year, $75,000, 7.35 percent loan 8 years ago. What is your current principal balance, assuming payments are made monthly?

A) $38,588
B) $45,130
C) $54,988
D) $67,351
E) $68,889

Question 68

Ten years ago, you borrowed $165,000 for 25 years at 7.5 percent interest. What is the current principal balance, assuming payments are made monthly?

A) $112,200
B) $131,534
C) $138,314
D) $140,362
E) $147,414

Question 69

How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?

A) The entire cash flow is paid to the non-PAC support bonds until those bonds are paid in full.
B) The cash flows are divided between PAC and non-PAC bonds on a pro-rata basis.
C) PAC payments are recomputed to a reduced fixed amount.
D) The entire cash flow is paid to the PAC bondholders.
E) The interest income is paid to the non-PAC bondholders with all principal amounts paid to the PAC bondholders.

Question 70

Four years ago, you borrowed $250,000 for 20 years at 8 percent. Payments are made monthly. How much interest have you paid thus far?

A) $74,222
B) $75,756
C) $75,909
D) $76,456
E) $77,121

Question 71

The total payment amount on an IO strip is:

A) fixed.
B) equal to the interest rate multiplied by the par value multiplied by the PSA rate schedule.
C) equal to the par value multiplied by the interest rate.
D) unknown until all payments have been made.
E) equal to the total interest computed on the bond's amortization schedule.

Question 72

Which one of the following will maximize the value of an IO strip?

A) prepaying all mortgages in the underlying mortgage pool
B) minimizing the duration of the underlying mortgage pool
C) maximizing the value of the PO strip
D) amortizing the bonds in the underlying pool faster than anticipated
E) creating conditions where no prepayments occur in the underlying mortgage pool

Question 73

A mortgage pool is divided into A, B, C, and Z-tranches as discussed in the textbook. What happens to the initial interest payment for the Z tranche?

A) It is immediately passed through to holders of Z tranche securities.
B) It is accumulated and held until the Z tranche securities mature.
C) It is exchanged for principal from the A tranche.
D) It is exchanged for principal from the B tranche.
E) It is exchanged for principal from the C tranche.

Question 74

What is the monthly mortgage payment on a $235,000, 20-year loan if the interest rate is 7.50 percent?

A) $1,034.07
B) $1,468.75
C) $1,576.06
D) $1,893.14
E) $2,622.47

Question 75

Which one of the following statements regarding PAC bonds is correct?

A) The cash flows from a PAC bond are less certain than those from a Z-tranche bond from a sequential CMO.
B) PAC bondholders receive the residual cash flows from the underlying mortgage pool.
C) PAC bonds are defined by the specific rules which created them.
D) PAC bonds have bounds based on market interest rates.
E) PAC bond cash flows are unaffected by mortgage prepayments.

Question 76

Which one of the following is required for the cash flows on a PAC bond to be predictable?

A) market interest rates must remain constant
B) market interest rates must steadily decline
C) mortgage prepayments must remain within the PAC collar
D) PAC support bonds must be prepaid in a timely manner
E) mortgage prepayments must exceed the specified PSA schedule

Question 77

A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. The mortgage principal will initially be paid to which one of the tranches?

A) A-tranche
B) B-tranche
C) C-tranche
D) Z-tranche
E) all tranches on a pro-rata basis

Question 78

A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. Which tranche will have the longest life?

A) A-tranche
B) B-tranche
C) C-tranche
D) Z-tranche
E) All tranches will have equal lives.

Question 79

A PAC support bond is most similar to which tranche in a sequential CMO?

A) A
B) B
C) C
D) Z
E) A PAC bond cannot be compared to a sequential CMO.

Question 80

You just assumed a 30-year mortgage for $270,000 at 8 percent interest. How much of the first monthly payment will be applied to the principal balance?

A) $153.14
B) $167.35
C) $172.17
D) $181.16
E) $193.28