35
CHAPTER 7
INTRODUCTION TO
ASSET-BACKED SECURITIES
PROBLEMS
1. Securitization is beneficial for banks because it:
A. repackages bank loans into simpler structures.
B. increases the funds available for banks to lend.
C. allows banks to maintain ownership of their securitized assets.
2. In a securitization, a special purpose vehicle (SPV) is responsible for the:
A. issuance of the asset-backed securities.
B. collection of payments from the borrowers.
C. recovery of underlying assets for delinquent loans.
3. In a securitization structure, time tranching provides investors with the ability to choose
between:
A. extension risk and contraction risk.
B. fully amortizing loans and partially amortizing loans.
C. senior bonds and subordinate bonds.
4. William Marolf obtains a 5 million EUR mortgage loan from Bank Nederlandse. A year
later the principal on the loan is 4 million EUR and Marolf defaults on the loan. Bank
Nederlandse forecloses, sells the property for 2.5 million EUR, and is entitled to collect
the shortfall, 1.5 million EUR, from Marolf. Marolf most likely had a:
A. bullet loan.
B. recourse loan.
C. non-recourse loan.
5. Fran Martin obtains a non-recourse mortgage loan for $500,000. One year later, when
the outstanding balance of the mortgage is $490,000, Martin cannot make his mortgage
payments and defaults on the loan. e lender forecloses on the loan and sells the house
for $315,000. What amount is the lender entitled to claim from Martin?
A. $0.
B. $175,000.
C. $185,000.
36 Part I: Learning Objectives, Summary Overview, and Problems
6. Anne Bogaert reviews the status of her home mortgage schedule for the month of January
2014:
Date Item Balance
01 January 2014 Outstanding mortgage loan balance $500,000
31 January 2014 Total monthly required payment $10,000
31 January 2014 Interest component of total monthly required payment $2,500
On 31 January 2014, Boagert makes a payment of $15,000 rather than $10,000.
What will be the outstanding mortgage loan balance immediately after the payment
is made?
A. $485,000
B. $487,500
C. $490,000
7. Which of the following describes a typical feature of a non-agency residential
mortgage-backed security (RMBS)?
A. Senior-subordinate structure in bond classes
B. A pool of conforming mortgages as collateral
C. A guarantee by the appropriate government sponsored enterprise (GSE)
8. Maria Nyugen is an analyst for an insurance company that invests in residential mortgage
pass-through securities. Nyugen reviews the monthly cash ow of one underlying mort-
gage pool to determine the cash ow to be passed through to investors:
Total principal paid including prepayment $1,910,542
Scheduled principal to be paid before prepayment $910,542
Gross coupon interest paid $3,562,500
Servicing fees $337,500
Other fees for guaranteeing the issue $58,333
Based on Nyugen’s table, the total cash ow to be passed through to the investors is
closest to:
A. $4,473,042.
B. $5,077,209.
C. $5,473,042.
9. In the context of mortgage-backed securities, a conditional prepayment rate (CPR) of 8%
means that approximately 8% of an outstanding mortgage pool balance at the beginning
of the year will be prepaid:
A. in the current month.
B. by the end of the year.
C. over the life of the mortgages.
10. For a mortgage pass-through security, which of the following risks most likely increases as
interest rates decline?
A. Balloon
B. Extension
C. Contraction
Chapter 7 Introduction to Asset-Backed Securities 37
11. From a lender’s perspective, balloon risk can best be described as a type of:
A. extension risk.
B. contraction risk.
C. interest rate risk.
12. Credit risk is a factor for commercial mortgage-backed securities because they are backed
by mortgage loans that:
A. are non-recourse.
B. have limited call protection.
C. have no prepayment penalty points.
13. Which commercial mortgage-backed security (CMBS) characteristic causes CMBS to
trade more like a corporate bond than an agency residential mortgage-backed security
(RMBS)?
A. Call protection
B. Internal credit enhancement
C. Debt-to-service coverage ratio level
14. An excess spread account incorporated into a securitized structure is designed to limit:
A. credit risk.
B. extension risk.
C. contraction risk.
15. Which of the following best describes the cash ow that owners of credit card
receivable-backed securities receive during the lockout period?
A. Only principal payments collected
B. Only finance charges and fees collected
C. No cash ow is received as all cash ow collected is reinvested.