73. Which of the following good news and bad news effect is NOT true when mortgage interest rates decline,
resulting in faster repayments?
74. Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ
from the PSA’s assumed pattern?
75. Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways?
76. A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is
77. Which of the following is an example of a negative duration asset that is valuable as a portfolio-hedging
device for an FI manager when included with regular bonds whose price-yield curves show the normal inverse
relationship?
78. What is defined as the sum of the products of the time when principal payments are received and the amount
of principal received all divided by total principal outstanding?
79. Which of the following best explains the term burn-out factor?
80. Which of the following is true concerning an assumable mortgage?
81. Why are the regular GNMA pass-throughs not very attractive to insurance companies and pension funds
seeking long-term duration assets to match their long-term duration liabilities?
82. In regard to a CMO, which of the following have the shortest average life with a minimum of prepayment
protection?
83. Why are the class C bonds highly attractive to insurance companies and pension funds?
84. These bonds have some prepayment protection and expected durations of five to seven years depending on
the level of interest rates and are primarily purchased by pension funds and life insurance companies.
85. Which of these CMO issues has characteristics of both a zero-coupon bond and a regular bond?
86. This is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes
have been retired.
87. Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust
after all other bond classes have been retired plus any reinvestment income earned by the trust.
88. Which of the following is NOT true of an R class CMO issue?
89. Why do garbage class bonds often have a negative duration?
90. What are the initial minimum capital requirements on the mortgage?
91. What amount of demand deposits are needed to fund the mortgage?
92. What is the deposit insurance premium on the demand deposits issued to fund the mortgage?
93. What would have been the capital requirements if the FI had securitized the mortgage?
94. What is the monthly payment on the mortgage pass-through?
95. For the first monthly payment, what portion is principal and what portion is interest?
96. If the entire mortgage pool is repaid after the second month, what is the second month’s (liquidating)
principal and interest payments?
97. What is the weighted average life of the above mortgage pool?
98. What is the present value of the mortgage pass-through if the entire pool is repaid after two months and
there is no change in interest rates?
99. What is the monthly payment on the mortgage pass-through if a 44 basis point servicing fee is deducted
monthly?
100. What is the present value of the mortgage pass-through if, immediately after origination, interest rates
increase to 8.25 percent per annum?
101. What are the annual coupon payments promised to each tranche? (Assume no prepayments and
non-amortization of principal.)
102. If at the end of the first year, the CMO trustee receives total cash flows of $15 million, how are they
distributed?
103. What is the principal outstanding on Tranche A and Tranche B after the end of year payment in the
previous question?
104. What is the first monthly payment on the Interest Only (IO) strip?
105. What is the first monthly payment on the Principal Only (PO) strip?
106. What is the monthly payment on the mortgage pass-throughs?
107. For the first monthly payment, what are the interest and principal portions of the payment?
108. If the entire mortgage pool is repaid after the second month, what is the second month’s interest and
principal payments?
109. If the entire mortgage pool is repaid at the end of the second month, what is the weighted average life of
the mortgage pool?
110. What is the monthly payment received by investors of the mortgage pass-through if the FI deducts a 50
basis points servicing fee?
111. What is the market (present) value of the mortgage pass-through to the investor if the interest rates on this
risk category of securities decrease to 7 percent? (Note that investors receive payments net of the 50 basis points
servicing fees.)
112. What are the annual payments promised to Tranche A and Tranche B, respectively, assuming no
prepayments and non-amortization?
113. If at the end of the first year, the trustee of the CMO receives total cash flows of $10 million, how are they
distributed to Tranche A and B, respectively?
114. What are the principals outstanding on Tranches A and B, respectively, after the CMO distributes the $10
million of cash flows?