Question 1

What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?

Accepted Answer

A)  Default is the key risk with residential mortgages; prepayment is the key risk with commercial mortgages
B)  Interest rate risk is the key risk with residential mortgages; prepayment is the key risk with commercial mortgages
C)  Prepayment is the key risk with residential mortgages; default is the key risk with commercial mortgages
D)  Prepayment is the key risk with residential mortgages; interest rate risk is the key risk with commercial mortgagesE) A) and D)
F) A) and B)

Question 2

Subprime mortgage-backed securities generally include FHA-insured or VA-guaranteed mortgages,along with conventional mortgages.

Accepted Answer

A) True 
 B)False

Question 3

Duration is defined as:

Accepted Answer

A)  A measure of the extent to which different investments expose an investor to interest rate risk
B)  A measure of the weighted-average time required before all principal and interest is received on an investment
C)  A measure that takes into account both the size of cash flows and the timing of their receipt
D)  All of the aboveE) None of the above
F) A) and B)

Question 4

Investors retain prepayment risk on MBBs,but issuers incur this risk with MPTBs.

Accepted Answer

A) True 
 B)False

Question 5

In comparison to other mortgage-backed securities,the unique characteristic of CMOs is that:

Accepted Answer

A)  CMO issuers do not retain ownership of the underlying mortgage pool
B)  CMOs are issued in multiple security classes
C)  The CMO mortgage pool is not overcollateralized
D)  CMOs are a pay-through in which all amortization and prepayments flow through to investorsE) B) and D)
F) B) and C)

Question 6

CDOs often include "B" notes,mezzanine debt and preferred equity as investments.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is NOT characteristic of commercial-backed mortgage securities?

Accepted Answer

A)  The underlying mortgage pool represents a variety of different property types (retail,multifamily,etc.) and a specific geographical area
B)  The underlying mortgages have usually been outstanding for several years
C)  One of the primary issuers of such securities are insurance companies
D)  In general,the underlying mortgage pool for such securities contain fewer mortgages than are included in residential-backed mortgage poolsE) B) and C)
F) All of the above

Question 8

The residual position in the CMO offering is considered which kind of position?

Accepted Answer

A)  Primary
B)  Equity
C)  Interest
D)  DebtE) A) and C)
F) A) and B)

Question 9

The main purpose of the Term Asset-Backed Securities Loan Facility (TALF) is to:

Accepted Answer

A)  Buy mortgage backed securities owned by Freddie Mac,Fannie Mae,and Ginnie Mae
B)  Issue CDOs and use the proceeds to fund infrastructure projects to stimulate the economy
C)  Regulate hedge funds to reduce investments in risky assets
D)  Use residential loans as collateral to purchase U.S.Treasuries as a way to reduce interest ratesE) A) and B)
F) A) and C)

Question 10

If a premium is paid on a CMO issue (at the time of issue),yields will increase as prepayment rates accelerate.

Accepted Answer

A) True 
 B)False

Question 11

CMO investors only pay taxes on interest income.

Accepted Answer

A) True 
 B)False

Question 12

A mortgage company is issuing a CMO with three tranches,with the principal and coupon rate given in the table below.When issued,the weighted average coupon on the CMO will be:

Accepted Answer

A)  9.25%
B)  10.00%
C)  10.08%
D)  11.00%E) C) and D)
F) A) and D)

Question 13

In CDOs both equity and debt holders prefer riskier,higher-yielding collateral to collect excess spreads.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements regarding mortgage pass-through bonds (MPTBs) is FALSE?

Accepted Answer

A)  MPTBs can be viewed as mortgage-backed bonds with the pass-through of principal and prepayment features of a mortgage pass-through security
B)  Most MPTBs are based on residential mortgage pools and are generally overcollateralized
C)  MPTBs represent an undivided equity ownership interest in a mortgage pool
D)  All of the above are false.E) All of the above
F) B) and D)

Question 15

Which of the following is NOT a CMO security type?

Accepted Answer

A)  A repeat floater
B)  A Z tranche
C)  An inverse floater
D)  An IO trancheE) A) and B)
F) A) and C)

Question 16

The credit rating of an MPTB depends largely on the:

Accepted Answer

A)  Amount of overcollateralization
B)  Degree to which government-related securities constitute the excess collateral
C)  Riskiness of the mortgage in the underlying pools
D)  All of the aboveE) A) and C)
F) A) and D)

Question 17

From the issuer's perspective,the use of MBBs and MPTBs should be viewed as a method of debt financing.

Accepted Answer

A) True 
 B)False

Question 18

Class A investors are sometimes repaid with an accelerated pattern of cash flows and are sometimes referred to as:

Accepted Answer

A)  Accelerated tranches
B)  Quick pay tranches
C)  Tranche residuals
D)  Fast pay tranchesE) None of the above
F) C) and D)

Question 19

A floater is a CMO tranche that has a variable interest rate.

Accepted Answer

A) True 
 B)False

Question 20

Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs.

Accepted Answer

A) True 
 B)False

Exam 20: The Secondary Mortgage Market: Cmos and Derivative Securities

In CDOs both equity and debt holders prefer riskier,higher-yielding collateral to collect excess spreads.

Correct AnswerverifiedShow Answer

Subprime mortgage-backed securities generally include FHA-insured or VA-guaranteed mortgages,along with conventional mortgages.

Correct AnswerverifiedShow Answer

The main purpose of the Term Asset-Backed Securities Loan Facility (TALF) is to:

Correct AnswerverifiedShow Answer

If a premium is paid on a CMO issue (at the time of issue),yields will increase as prepayment rates accelerate.

Correct AnswerverifiedShow Answer

A mortgage company is issuing a CMO with three tranches,with the principal and coupon rate given in the table below.When issued,the weighted average coupon on the CMO will be:

Correct AnswerverifiedShow Answer

CDOs often include "B" notes,mezzanine debt and preferred equity as investments.

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In comparison to other mortgage-backed securities,the unique characteristic of CMOs is that:

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Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs.

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Investors retain prepayment risk on MBBs,but issuers incur this risk with MPTBs.

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The credit rating of an MPTB depends largely on the:

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Class A investors are sometimes repaid with an accelerated pattern of cash flows and are sometimes referred to as:

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A floater is a CMO tranche that has a variable interest rate.

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CMO investors only pay taxes on interest income.

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Which of the following statements regarding mortgage pass-through bonds (MPTBs) is FALSE?

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The residual position in the CMO offering is considered which kind of position?

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Which of the following is NOT characteristic of commercial-backed mortgage securities?

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Duration is defined as:

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What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?

Correct AnswerverifiedShow Answer

Which of the following is NOT a CMO security type?

Correct AnswerverifiedShow Answer

From the issuer's perspective,the use of MBBs and MPTBs should be viewed as a method of debt financing.

Correct AnswerverifiedShow Answer

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