In a CMBS transaction, the special servicer is responsible for overseeing the deal,
verifying that all servicing agreements are being maintained, and facilitating the timely
payment of interest and principal.
Fusion or hybrid deals are multiple borrower CMBS deals that combine loans that are
included in conduit deals with a large or “mega” loan.
The two measures that have been found to be key indicators of the potential credit
performance of a commercial mortgage loan are the debt-to-service coverage ratio and
the loan-to-value ratio.
CMBS are backed by either newly originated or seasoned commercial mortgage loans.
CMBS can be issued by Ginnie Mae, Fannie Mae, Freddie Mac, and private entities.
Balloon risk associated with a commercial mortgage loan is the risk that a borrower will
not be able to make the balloon payment because either the borrower cannot arrange for
refinancing at the balloon payment date or cannot sell the property to generate sufficient
funds to pay off the balloon balance.
The least prevalent form of deal backed by commercial mortgage loans to multiple
borrowers is the conduit deal.
A commercial mortgage-backed security is a security backed by at least two
commercial mortgage loans, the loans being either newly originated or seasoned loans.
Balloon risk is something that has to be dealt with in structuring an RMBS.
Residential mortgage loans are nonrecourse loans for the purchase of income-producing
properties, the major ones being apartment buildings, office buildings, industrial
properties, shopping centers, hotels, and health care facilities.
Put protection for commercial mortgage loans includes prepayment lockout,
defeasance, prepayment penalty points, and yield maintenance charges.
CMBS can be classified only by CMBS with loans from a single borrower.
The process of deciding which type of risk to insure against is referred to as the
underwriting process.
a. True.
b. False.
The sale of a security with a commitment by the seller to buy the security back from the
purchaser at a specified price and a designated future date is referred to as:
a. A negotiable CD.
b. A repurchase agreement.
c. A reverse repo.
d. A commercial paper.
e. None of the above.
When the issuer of a security files a registration statement with the SEC, part I of the
registration is:
a. The prospectus.
b. Supplemental information.
c. A letter of comments.
d. A deficiency letter.
e. None of the above.
Which one of the following are examples of financial assets?
a. U.S. Treasury bonds.
b. Foreign bonds.
c. Home mortgage loan.
d. Common stock.
e. All of the above
Both parties to a repo transaction are exposed to credit risk.
a. True.
b. False.
“Market failure” is cited by economists as a reason for:
a. Increased globalization.
b. Regulation.
c. Competition.
d. Competitive markets.
e. None of the above.
There are no margin requirements for the buyer of an option once the option price has
been paid in full.
a. True.
b. False.
Revenue bonds are debt obligations of municipalities that are backed by tax revenues.
a. True.
b. False.
Whenever investment bankers assist in offering the securities of government-owned
companies to private investors, this process is referred to as:
a. Initial public offering.
b. Privatization.
c. Underwriting.
d. Firm commitment.
e. None of the above.
A general obligation bond is said to be double-barreled when it is secured by:
a. The issuer’s general taxing power.
b. Certain identified fees, grants, and special charges provide additional revenues from
outside the general fund.
c. A specified number of fixed assets.
d. a and b only.
e. All of the above.
Selling stock index futures will increase a portfolio’s beta.
a. True.
b. False.
An out-of-the-money option has no intrinsic value.
a. True.
b. False.
The financial instruments traded in the Federal agency securities market include:
a. Federally related institutions’ securities.
b. Government-sponsored agency securities.
c. Federal funds.
d. a and b only.
e. All of the above.
LIBID is the arithmetic average of LIBOR and LIMEAN.
a. True.
b. False.
Which of the following statements about duration is most correct?
a. Duration for a coupon bond is greater than its maturity.
b. For a zero-coupon bond, the duration is equal to its maturity.
c. For bonds with the same maturity and selling at the same yield, the lower the coupon
rate, the greater a bond’s duration and volatility.
d. For bonds with the same coupon rate and selling at the same yield, the longer the
maturity, the larger the duration and price sensitivity.
e. b, c, and d only.
A common OTC option between two sectors of the market is an option on:
a. Interest rates.
b. The yield curve.
c. Fixed-income securities.
d. Pass-throughs.
e. None of the above.
The fundamental difference between discount and coupon Treasury securities is:
a. The spread between the bid and ask prices is narrower than in other sectors of the
bond market.
b. The form of the payment stream that the holder receives.
c. The inflation premium.
d. The tax to be paid on the income received by the holder.
e. None of the above.
The slope of the capital market line (CML) is also referred to as the market price of
risk.
a. True.
b. False.
The banks in a syndicated loan have the right to sell their parts of the loan to other
banks.
a. True.
a. False.
Which of the following is false?
a. Warrants are attached to a bond or preferred stock.
b. Warrants may be detached from the host security that they were attached to.
c. Warrants can be traded separately on major national exchanges.
d. Warrants have a value.
e. None of the above.
The transformation curve or production function:
a. Rises from the left to the right.
b. Assumes that the more is invested, the more will be the resulting future output.
c. Assumes decreasing returns to scale.
d. Has a slope, which measures the marginal productivity of capital.
e. All of the above.
Which of the following is false with respect to the regulatory changes in trading?
a. The SEC cost study in 2001 indicated that for many types of orders, investors get
worse prices when they trade on the NASDAQ than on the NYSE.
b. Stocks are now traded with a spread of 1/16.
c. Regulation FD requires that information be made available to all investors at the
same time.
d. Decimalization was adopted in 2001 with minimum price changes of one cent.
e. Cost differences exist because of structural differences between the NYSE and
NASDAQ.
Preferred stock as a class of stock has characteristics of both common stock and debt.
a. True.
b. False.
Locals are brokers who:
a. Buy and sell for their own account.
b. Are professional risk takers.
c. Add liquidity to the futures market.
d. Play the same effective role as a market maker.
e. All of the above.
Insurance companies have increasingly sold products that have a significant investment
component in addition to their insurance component. Major investment oriented
products include:
a. Guaranteed investment contracts.
b. Annuities.
c. Insurance wrappers.
d. a and b only.
e. All of the above.
A debenture bond is an obligation guaranteed by another entity.
a. True.
b. False.
If the issuer of a bond has the choice to retire all or part of an issue prior to maturity, the
bondholder is exposed to:
a. Call risk.
b. Timing risk.
c. Refunding risk.
d. a and b only.
e. All of the above.
Corporate senior instruments:
a. Are financial obligations of a corporation.
b. Include debt obligations and preferred stock.
c. Have priority over common stock in the case of bankruptcy.
d. All of the above.
e. None of the above.
The revenues generated by investment banking firms come from:
a. Commissions.
b. Fee income.
c. Spread income.
d. b and c only.
e. All of the above.
For a pool of credit card receivables, the cash flow consists of:
a. Collected finance charges.
b. Fees.
c. Principal.
d. a and b only.
e. All of the above.
A loan in which a group of banks provides funds to the borrower is known as a:
a. Senior bank loan.
b. Syndicated bank loan.
c. Domestic bank loan.
d. Participation loan.
e. None of the above.
A CMO is structured with various bond classes referred to as:
a. Serial bonds.
b. Tranches.
c. Class.
d. Series.
e. None of the above.
According to the reinsurance transaction, the “reinsurer” is:
a. The insurer transferring the risk.
b. The insurer accepting the risk.
c. The insurer that wrote the policy.
d. The policy holder whose policy is transferred.
e. None of the above.
Which of the following statements is incorrect?
a. Derivative instruments derive their value from the price of the underlying financial
instrument.
b. Derivative instruments give the holder the right, but not the obligations, to buy or sell
a financial assets.
c. Derivative instruments can be used for speculative purposes.
d. Derivative instruments can be used for accomplishing a specific financial objective.
e. None of the above.
Corporate bond issues that are arranged so that specified principal amounts become due
on specified dates prior to maturity are called:
a. Bullet-maturity bonds.
b. Serial bonds.
c. Term bonds.
d. Notes.
e. None of the above.
As with a nonagency RMBS, a servicer is required. Name three responsibilities of a
servicer.
CMBS can be classified by the type of loan pool. Name and briefly describe the two
types.
What is a yield maintenance charge?
Are CMBS and nonagency RMBS structures similar or different? Discuss.
What is a prepayment lockout?
The most prevalent form of deal backed by commercial mortgage loans to multiple
borrowers is the conduit deal. Describe the nature of this “conduit deal”?
In regards to commercial mortgage loans, name four of the major property types that
have been securitized.
Describe some main features of a commercial loan.