41) 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
42) 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.
43) 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
44) Which one of the following is a government agency?
A) FHLMC
B) Fannie Mae
C) Freddie Mac
D) GNMA
E) FNMA
45) 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.
46) 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
47) 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
48) 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
49) 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
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
51) 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
52) 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
53) 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
54) 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.
55) 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.
56) 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
57) 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
58) 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
59) 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
60) 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.
61) 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.
62) 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.
63) 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
64) 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
65) 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.
66) 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.
67) 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.
68) 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
69) 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.
70) 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
71) 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
72) 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.
73) 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
74) The CPR for a seasoned 150 PSA mortgage is 8.4 percent. What is the single monthly
mortality?
A) 0.7285 percent
B) 0.7558 percent
C) 0.7949 percent
D) 0.8013 percent
E) 0.8129 percent
75) The CPR for an unseasoned 100 PSA mortgage is 4.5 percent. What is the single monthly
mortality?
A) 0.3557 percent
B) 0.3635 percent
C) 0.3752 percent
D) 0.3830 percent
E) 0.3986 percent