Finance Chapter 20 1 Which one of the following terms is applied to the process

Fundamentals of Investments, 8e (Jordan)

Chapter 20 Mortgage-Backed Securities

1) 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

2) 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

3) 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

4) 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

5) 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

6) 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

7) 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

8) 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

9) 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

10) 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

11) 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

12) 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

13) 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

14) 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.

15) 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

16) 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

17) 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

18) 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

19) 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

20) 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

21) 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

22) 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

23) 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

24) 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

25) 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

26) 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

27) 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.

28) 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.

29) 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

30) 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

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

32) 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 90th payment has been paid?

A) zero

B) < $75,000

C) $75,000

D) > $75,000

E) cannot be determined from the information provided

33) 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

34) 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

35) 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

36) 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

37) 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

38) 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

39) 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.

40) 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