Saunders Chapter 27 Securitization Test Bank

Chapter 27 Securitization

KEY

1. Depository institutions have followed and originate-to-distribute model of loan origination only since the Financial Services Modernization Act of 1999. 

2. The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-distribute strategy of loan origination. 

3. Securitization of assets increases the FI's capital requirements. 

4. When a Special Purpose Vehicle (SPV) creates asset-backed securities, the SPV retains ownership of the original assets. 

5. The life of a Structured Investment Vehicle (SIV) is not tied to any particular asset class that it is responsible for securitizing. 

6. Investors in a Structured Investment Vehicle (SIV) have no direct right to the cash flows on the underlying portfolio of the SIV. 

7. Despite the complexity of measuring the risk of asset-backed securities, credit rating agencies continued to use their own measures to quantify risks involved. 

8. GNMA helps create pass-through asset-backed securities by providing timing insurance. 

9. GNMA is a privately-owned entity. 

10. GNMA will sponsor any pool of loans regardless of the size of each individual loan in the pool. 

11. FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies. 

12. Historically, FNMA has had a secured line of credit with the U.S. Treasury. 

13. FNMA does not hold the mortgages it purchases on its balance sheet, thereby transferring credit and default risk to investors purchasing its securities. 

14. The three government agencies that sponsor the creation of mortgage-backed, pass through securities are: GNMA, FNMA, and FDIC. 

15. On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a federal government agency. 

16. FNMA securitizes conventional mortgage loans as well as FHA/VA insured loans. 

17. Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be non-assumable if the property is sold. 

18. GNMA is more active in the market for mortgage pass-through securities than either FNMA or FHLMC. 

19. Unlike GNMA, FNMA will securitize conventional mortgages issued by depository institutions. 

20. The securities that form a GNMA pass-through are U.S. Treasury bonds, bills, and notes. 

21. All tranches in a collateralized mortgage obligation (CMO) have the same prepayment risk exposure. 

22. GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems. 

23. GNMA pass-through bondholders can be protected against default risk by FHA/VA housing insurance. 

24. Investors in GNMA pass-through securities are exposed to the risk that the originating bank may fail, and the risk that the trustee may mismanage monthly interest and principal payments collected. 

25. Current statistics show that the servicing fee depository institutions can earn by securitizing through GNMA approximates 44 basis points. 

26. Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest. 

27. Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows. 

28. The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates. 

29. One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured. 

30. All else equal, once a mortgage pool has aged, prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool. 

31. One cause of residential mortgage prepayment risk is the sale of the mortgaged property. 

32. It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages. 

33. The call option held by the residential mortgage holder is in the money when market interest rates are less than the interest rate on an existing mortgage. 

34. A bad news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes a reduction in the discount rate on the mortgage cash flow. 

35. A good news effect of increased mortgage prepayments on a mortgage pool caused by decreasing market interest rates includes the receipt of fewer scheduled interest payments. 

36. Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools. 

37. The weighted-average life of a loan is always greater than the duration of the loan. 

38. Mortgage pools that are assumed to prepay at a rate of speed that is more rapid than the PSA model would indicate, are said to prepay at less than 100 percent PSA behavior because the mortgage life and balance will exist for a longer time. 

39. Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity. 

40. CMOs are typically created from existing GNMA pass-through securities that are held in trust. 

41. The creation and sale of CMOs is based, at least in part, on the ability to segment the market for pass-through security products. 

42. Mortgage-backed bonds are a form of on-balance-sheet securitization. 

43. Most mortgage-backed bond issues conducted by depository institutions are under-collateralized. 

44. Mortgage-backed bonds differ from CMOs and pass-through securities in that there is no direct link between the cash flows on the mortgages and the interest and principal payments on the bonds. 

45. A mortgage pass-through strip security is a special type of collateralized mortgage obligation (CMO). 

46. An interest-only (IO) mortgage pass-through strip has a claim on the present value of interest payments on the mortgages in a GNMA pool. 

47. The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market interest rates. 

48. At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip. 

49. An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset. 

50. A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates. 

51. A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio. 

52. The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security. 

53. Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans. 

54. In constant prepayment rates (CPRs), the prepayment speed of the security in question is constant or, the timing of the prepayments doesn’t adhere to defined patterns. 

55. The prepayment model developed by the Public Securities Association is an empirically based model that reflects an average rate of prepayment based on the past experience of pools of FHA-insured mortgages 

56. A bond sold to investors whose cash flows reflect the monthly interest payments received from a pool of mortgages is referred to as an OI strip. 

57. Which of the following are reasons that the actual prepayment rate on a specific mortgage pool backing a specific pass-through security may differ from PSA’s assumed pattern?

A. age of the mortgage pool and the size of the pool

B. geographic location and assumability of mortgages in the pool

C. age and job status of mortgagees in the pool

D. level of the pool’s coupon relative to the current mortgage coupon rate

E. all of the above are reasons

58. Which of the following are not considered a simplifying assumption indicative of the restrictive nature of the option model approach and the option-adjusted spread?

A. The only reasons for prepayment are due to refinancing mortgages at lower rates; there is no prepayment for turnover reasons.

B. The current discount (zero-coupon) yield curve for T-bonds is flat.

C. The mortgage coupon rate is 10% on an outstanding pool of mortgages with an outstanding principal balance of $1 million.

D. Mortgage loans are fully amortized, and there is no servicing fee.

E. The interest rate movements over time change a maximum of 10% up or down each year and the time path of interest rate does not follow a binomial process.

59. The packaging of loans into asset pools and then selling portions of the pool to investors is known as 

A. security creation.

B. securitization.

C. loan transfer.

D. loan collateralization.

E. mutual fund management.

60. Which of the following is a primitive form of asset securitization? 

A. Loan sales.

B. Pass-through security.

C. Collateralized mortgage obligation.

D. Mortgage-backed bond.

E. Timing insurance.

61. Which of the following is not accomplished by securitization of assets? 

A. Increases the liquidity of assets.

B. Provides a new source of funds.

C. Increases the costs of monitoring.

D. Decreases the duration of assets.

E. Decreases the costs of regulation.

62. A commercial bank operating under an originate-to-distribute model is acting most like 

A. an asset transformer.

B. an asset broker.

C. a portfolio lender.

D. an asset accumulator.

E. an investment bank.

63. Which type of loans are securitized most often? 

A. Residential mortgages.

B. Credit card loans.

C. Auto loans.

D. Student loans.

E. Commercial and industrial (C&I) loans.

64. Which of the following is the more traditional form of off-balance sheet subsidiary for removing loans from the FIs balance sheet? 

A. Special Purpose Vehicle (SPV)

B. Asset-Backed Structure (ABS)

C. Structured Investment Vehicle (SIV)

D. Collateralized Mortgage Operation (CMO)

E. Mortgage Backed Subsidiary (MBS)

65. When FIs form off-balance sheet subsidiaries to remove assets from their balance sheet, the subsidiary activities 

A. are regulated as though they are part of the parent institution.

B. occur beyond the reach of existing state and federal monitoring and regulation.

C. are monitored and regulated by the Securities and Exchange Commission (SEC).

D. are reported to the National Association of Securities Dealers (NASD).

E. must follow the Bank for International Settlements (BIS) capital adequacy standards.

66. The life span of an SPV (Special Purpose Vehicle) is limited to 

A. the life of the sponsoring FI.

B. the duration of its liabilities.

C. the life of the asset-backed security that it created from the loans in its portfolio.

D. the life is unlimited as it can exist beyond its initial purpose.

E. the duration the Federal Reserve determines.

70. One difference between a Special Purpose Vehicle (SPV) and a Structured Investment Vehicle (SIV) is that the

A. SIV can potentially earn an expected spread between its high-yielding assets and the relatively short-term, low cost funds that it borrows in addition to servicing fees.

B. SPV retains ownership of the loans while the SIV sells the loans without recourse so the loan rights are transferred to the investor.

C. SPV may have a line of credit or a loan commitment from the sponsoring institution if a loan goes bad and it cannot make payments to investors; the SIV has no such arrangement.

D. SIV is just passing cash flows it receives through to the ultimate investor; the SPV has fixed payment obligations that must be met regardless of cash flows received on the loan portfolio.

E. SPV is formed by depository institutions and the SIV is formed by non-depository institutions.

71. Which of the following statements is true regarding Special Purpose Vehicles (SPVs) and structured investment vehicles (SIVs)?

A. An SPV has no contingent credit risk when it sells asset-backed securities (ABS) with recourse to investors.

B. An SPV retains the rights to the loans that are used as collateral in an asset-backed security.

C. An SIV potentially has more liquidity risk than the sponsoring FI due to the short-term nature of the liabilities and their reliance on short-term funds.

D. An SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.

E. An SIV is not a lucrative or profitable as an SPV.

72. One difference between a special purpose vehicle (SPV) and a structured investment vehicle (SIV) is  

A. there is no difference; these are just two different names for the same type of subsidiary.

B. the SPV has stockholders that share in the profits; the SIV only has debt.

C. the SIV ceases to exist when the loans in its portfolio cease to exist; the SPV outlives its loan portfolio.

D. the SPV is allowed to accept deposits while the SIV must rely solely on other borrowings.

E. the SIV raises funds first and then acquires loans from the sponsoring FI; the SPV receives the loans first and creates an asset-backed security which it sells and transfers the funds back to the sponsoring FI.

73. Which of the following assets have not been securitized by FIs? 

A. Mortgages.

B. Credit card receivables.

C. Auto loans.

D. Debts of Lesser Developed Countries (LCD debt).

E. Student loans.

74. As of 2015, the amount of mortgage-backed securities outstanding was approximately 

A. $2.9 trillion.

B. $5.1 trillion.

C. $7.8 trillion.

D. $11.0 trillion.

E. $15.0 trillion.

75. All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT 

A. lower regulatory taxes.

B. increased fee-based income.

C. increased liquidity.

D. decreased asset and liability duration mismatch.

E. increased capital requirements.

76. Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities? 

A. Government National Mortgage Association.

B. Farmers Home Administration.

C. Federal National Mortgage Association.

D. Federal Home Loan Mortgage Corporation.

E. All of the options are directly involved.

77. The Government National Mortgage Association 

A. is a private corporation owned by shareholders.

B. purchases pools of mortgages originated by FIs.

C. provides timing insurance to investors in mortgage-backed securities.

D. only approves conventional and FHA/VA insured mortgages.

E. was the first agency to securitize residential mortgages.

78. On September 7, 2008, both FHMA and FHLMC were placed under conservatorship by the 

A. Federal Reserve.

B. Federal Housing Finance Agency.

C. Federal Deposit Insurance Corporation.

D. Federal Home Loan Bank.

E. Comptroller of the Currency.

79. Which of the following is an incentive to securitize mortgage assets? 

A. To reduce the regulatory tax burden on the FI.

B. To adjust the gap exposure of the FI.

C. To improve the liquidity of the FI.

D. To generate non-interest sensitive fee income.

E. All of the options.

80. Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets? 

A. Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity.

B. Both agencies overcharged lenders for services they provided.

C. Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet.

D. All of the options.

E. Both agencies overcharged lenders for services they provided, and Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet.

81. Which of the following are functions of GNMA? 

A. Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages.

B. Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and mortgage bankers.

C. Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.

D. All of the options.

E. Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and mortgage bankers and acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.

82. Which is the oldest mortgage-backed security sponsoring agency? 

A. GNMA.

B. FNMA.

C. FHA.

D. FMHA.

E. FHLMC.

83. Which of the following is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security? 

A. Refinancing.

B. Default risk.

C. Housing turnover.

D. Non-assumable mortgages.

E. All of the options.

84. Servicing a pass-through security refers to 

A. an FI processing of all payments.

B. an FI provision of clearing services to set up the pass-through.

C. broker/dealer services provided by the FI to the ultimate holders of the pass-through.

D. guarantee by the FI of all principal and interest payments.

E. an FI provision of liquidity services to the ultimate holders of the pass-through.

85. The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT 

A. the tranches will have different coupon rates.

B. the CMO securities are insured separately from the GNMA pass-through securities.

C. the principal payments are made totally to the earliest remaining tranche.

D. GNMA pass-through securities are used as collateral in a trust to support the CMOs.

E. the CMO securities are split into different tranches or groupings.

86. Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is 

A. prepayment risk

B. default risk

C. credit risk

D. interest rate risk

E. liquidity risk

87. Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments? 

A. Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect).

B. Low yields lead to faster prepayment of the mortgage pool's principal (good news effect).

C. With early prepayments comes fewer interest payments in absolute terms (bad news effect).

D. Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect).

E. Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).

88. 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? 

A. The age of the mortgage pool.

B. Geographic location.

C. Seasons in the year in which the mortgage was originated.

D. Full or partial amortization of the payments.

E. Assumability of mortgages in the pool.

89. Mortgage-backed bonds (MBB) differ from pass-throughs and CMOs in which of the following ways? 

A. The MBB bondholders have a junior claim to assets of the FI.

B. There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB.

C. The assets backing a MBB issue are normally removed from the balance sheet of the FI.

D. Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.

E. None of the options.

90. A claim to the present value of the interest payments made by the mortgage holders in a GNMA pool is 

A. a CARS.

B. an IO strip.

C. a CARD.

D. a PO strip.

E. a prepayment claim.

91. 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. 

A. PO strip.

B. IO strip.

C. Class B bonds

D. Class Z bonds

E. Class A bonds

92. 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? 

A. Weighted-average life.

B. Burn-out factor.

C. Degree of collateralization.

D. Option-adjusted spread.

E. Time to maturity.

93. Which of the following best explains the term burn-out factor? 

A. The percent of mortgage contract that is transferred from the seller to the buyer of a house.

B. The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.

C. The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.

D. A mortgage-backed bond issued in multiple classes or tranches.

E. Bonds collateralized by a pool of assets.

94. Which of the following is true concerning an assumable mortgage? 

A. The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.

B. The mortgage contract is transferred from the seller to the buyer of a house.

C. The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.

D. A mortgage-backed bond issued in multiple classes or tranches.

E. Bonds collateralized by a pool of assets.

95. 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? 

A. Because of their short expected duration.

B. Because these bonds have the shortest average life with a maximum of prepayment protection.

C. Because they are zero coupon bonds and hence carry maximum amount of risk.

D. Because of their failures to offer prepayment protection.

E. Bondholders receive the promised coupon and principal payments but are not entitled to accrued interest payments.

96. In regard to a CMO, which of the following bonds have the shortest average life with a minimum of prepayment protection? 

A. Class A bonds.

B. Class B bonds.

C. Class C bonds.

D. Class Z bonds.

E. Class R bonds.

97. Why are the class C bonds of a CMO highly attractive to insurance companies and pension funds? 

A. Because of their ability to offer perfect prepayment protection.

B. Because of the shortest average life with a minimum of prepayment protection.

C. Because of their long expected duration.

D. Because they are basically zero coupon bonds and hence carry a minimum amount of risk.

E. Because of their ability to offer perfect prepayment protection and because they are basically zero coupon bonds and hence carry a minimum amount of risk.

98. These bonds of a CMO 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. 

A. Class A bonds.

B. Class R bonds.

C. Class C bonds.

D. Class Z bonds.

E. Class B bonds.

99. Which of these CMO bond issues has characteristics of both a zero-coupon bond and a regular bond? 

A. Class A bonds.

B. Class B bonds.

C. Class C bonds.

D. Class Z bonds.

E. None of the options.

100. This is an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired. 

A. Class A bonds.

B. Class B bonds.

C. Class C bonds.

D. Class Z bonds.

E. None of the options.

101. 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. 

A. Class A bonds.

B. Class B bonds.

C. Class C bonds.

D. Class Z bonds.

E. Class R bonds.

102. Which of the following is NOT true of an R class CMO issue? 

A. It is treated as "garbage class."

B. It is a high-risk investment class.

C. It gives the investor the rights to the over-collateralization and reinvestment income on the cash flows in the CMO trust.

D. Returns increase when interest rates increase.

E. It has a positive duration.

103. Why do garbage class bonds often have a negative duration? 

A. The value of the returns in this bond class increases when interest rates increase.

B. It gives the rights to collateralization.

C. Bond values fall with interest rate increases.

D. It gives rights to reinvestment income on the cash flows in the CMO trust.

E. Significant risk premium required by the uninsured depositors.

104. An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points.

What is the minimum capital requirement on the mortgage in order for the institution to be adequately capitalized? 

A. $0.

B. $400,000.

C. $200,000.

D. $500,000.

E. $5,000,000.

Feedback: Refer to Chapter 20: Capital Adequacy
With a loan-to-value of 70%, the mortgage falls into mortgage risk category 1 and carries a risk weight of 50 percent. In order to be adequately capitalized the bank must have a total risk-based capital ratio of 8%.
Capital requirement = $5,000,000 × 0.50 × 0.08 = $200,000

105. An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points.

What amount of demand deposits are needed to fund the mortgage? 

A. $5,500,000.

B. $400,000.

C. $5,555,555.

D. $500,000.

E. $5,000,000.

Feedback: Refer to Chapter 19: Deposit Insurance and Other Liability Guarantees
Minimum demand deposits to fund $5,000,000 mortgage and also to fund required reserves.

Demand deposits = loan amount ÷ (1 - reserve ratio)
DD = 5,000,000 ÷ (1 - 0.10) = 5,000,000 ÷ 0.90 = $5,555,555

106. An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points.

What is the deposit insurance premium on the demand deposits issued to fund the mortgage? 

A. $11,756.

B. $12,778.

C. $11,500.

D. $1,150.

E. $9,200.

Feedback: Deposit insurance premium is 23 basis points
$5,555,555 × 0.0023 = $12,777.77

107. An FI funds a $5 million residential mortgage in 2017 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium of 23 basis points.

What would have been the capital requirements if the FI had securitized the mortgage? 

A. $0.

B. $400,000.

C. $200,000.

D. $500,000.

E. $5,000,000.

Feedback: If the mortgage was immediately securitized and removed from the balance sheet, there would be no capital requirements necessary.

108. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

What is the monthly payment on the mortgage pass-through? 

A. $100,000.

B. $110,065.

C. $12,000.

D. $12,000,000.

E. $80,000.

Feedback: Total value of pass-through = 100 × 150,000 = $15,000,000

109. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

For the first monthly payment, what portion is principal and what portion is interest? 

A. $100,000 principal and $10,065 interest.

B. $12,000 interest and no principal.

C. $100,000 interest and no principal.

D. $100,000 interest and $10,065 principal.

E. $10,000 interest and $2,000 principal.

Feedback: Accrued interest first month: $15,000,000 × (0.08 ÷ 12) = $100,000.
Payment - Interest = Principal
110,065 - 100,000 = 10,065

110. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

If the entire mortgage pool is repaid after the second month, what is the second month's (liquidating) principal and interest payments? 

A. $99,933 interest and $14,989,935 principal.

B. $100,000 interest and $10,065 principal.

C. $100,000 interest and $15,000,000 principal.

D. $99,933 principal and $14,989,935 interest.

E. $12,000 interest and $138,000 principal.

Feedback:

111. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

What is the weighted average life of the above mortgage pool? 

A. 30 years.

B. 2 months.

C. 1.998 months.

D. 1 month.

E. 1.5 months.

Feedback: Weighted-average life:



WAL = 1.9987 months

112. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

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? 

A. $14,989,935.

B. $15,089,868.

C. $15,000,000.

D. $15,110,065.

E. $14,889,935.

Feedback: Remaining principal after 2 months

Some rounding error may occur

113. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

What is the monthly payment on the mortgage pass-through if a 44 basis point servicing fee is deducted monthly? 

A. $105,499.

B. $114,700.

C. $11,340.

D. $1,055.

E. $1,277,494.

Feedback: The 44 basis point servicing fee is deducted from the pool coupon, and payment recalculated:

I = 0.08 - 0.0044 = 0.0756 or 0.0063 monthly

114. One hundred identical mortgages are pooled together into a pass-through security. Each mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid monthly), and is fully amortized over a term of 30 years.

What is the present value of the mortgage pass-through if, immediately after origination, interest rates increase to 8.25 percent per annum? 

A. $15,000,000.

B. $14,650,591.

C. $14,000,000.

D. $15,115,493.

E. $15,267,549.

Feedback: Present value of an ordinary annuity
New market rate of interest = 8.25/12 = 0.6875 monthly

115. The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $110 million and pays 5 percent annually. Tranche B has a face value of $90 million and pays 7 percent annually.

What are the annual coupon payments promised to each tranche? (Assume no prepayments and non-amortization of principal.) 

A. $5.5 million on Tranche A and $6.3 million on Tranche B.

B. $5.5 million on Tranche B and $6.3 million on Tranche A.

C. A total of $12 million on both Tranche A and B.

D. $4.5 million on Tranche A and $7.7 million on Tranche B.

E. $4.5 million on Tranche B and $7.7 million on Tranche A.

Feedback: Due to the non-amortizing principal, the payment is face value times coupon

116. The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $110 million and pays 5 percent annually. Tranche B has a face value of $90 million and pays 7 percent annually.

If at the end of the first year, the CMO trustee receives total cash flows of $15 million, how are they distributed? 

A. $7.5 million to Tranche A and $7.5 million to Tranche B.

B. $15 million to Tranche A and nothing to Tranche B.

C. $5.5 million to Tranche A and $9.5 million to Tranche B.

D. $8.7 million to Tranche A and $6.3 million to Tranche B.

E. $7.1 million to Tranche A and $7.9 million to Tranche B.

Feedback:

117. The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $110 million and pays 5 percent annually. Tranche B has a face value of $90 million and pays 7 percent annually.

What is the principal outstanding on Tranche A and Tranche B after the end of year payment in the previous question? 

A. $110 million on Tranche A and $90 million on Tranche B

B. $95 million on Tranche A and $90 million on Tranche B.

C. $106.8 million on Tranche A and $90 million on Tranche B.

D. $110 million on Tranche A and $86.8 million on Tranche B.

E. $108.4 million on Tranche A and $88.4 million on Tranche B.

Feedback:

118. The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments.

What is the first monthly payment on the Interest Only (IO) strip? 

A. $3,000,000.

B. $421,928.

C. $250,000.

D. $299,775.

E. $171,928.

Feedback: Payment on IO strip: Principal × (annual rate ÷ 12) = $50,000,000 × 0.05 = $250,000

119. The underlying GNMA 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments.

What is the first monthly payment on the Principal Only (PO) strip? 

A. $3 million.

B. $421,928.

C. $250,000.

D. $299,775.

E. $171,928.

Feedback:

Remove interest paid to the IO strip: 421928 - 250,000 = $171,928

120. Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum.

What is the monthly payment on the mortgage pass-through? 

A. $37,500.

B. $45,231.

C. $45,309.

D. $50,713.

E. $55,256.

Feedback: Ordinary annuity payment

121. Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum.

For the first monthly payment, what are the interest and principal portions of the payment? 

A. $37,500 principal and $13,213 principal.

B. $37,500 interest and $13,213 principal.

C. $37,500 principal and $7,809 interest.

D. $37,500 interest and $7,809 principal.

E. $37,500 interest and $17,756 principal.

Feedback: First month interest: 5,000,000 × (0.09 ÷ 12) = 37,500
First months principal: PMT - interest = 50,713 - 37,500 = $13,213

122. Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum.

If the entire mortgage pool is repaid after the second month, what is the second month's interest and principal payments? 

A. $37,441 interest and $13,275 principal.

B. $13,275 principal and $37,441 interest.

C. $13,312 interest and $4,986,786 principal.

D. $4,986,786 interest and $37401 interest.

E. $37,401 interest and $4,986,786 principal.

Feedback: Month 1 principal: (5,000,000 - 13,213) = 4,986,787
Month 2 interest: 4,986,787 × (0.09 ÷ 12) = $37,401
Month 2 principal reduction: 50,713 - 37,401 = $13,312

123. Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum.

If the entire mortgage pool is repaid at the end of the second month, what is the weighted average life of the mortgage pool? 

A. 2.10 months.

B. 2 months.

C. 1.997 months.

D. 1.95 months.

E. 1.90 months.

Feedback: Weighted-average life:



WAL = 1.9974 months

124. Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum.

What is the monthly payment received by investors of the mortgage pass-through if the FI deducts a 50 basis points servicing fee? 

A. $49,237.

B. $50,713.

C. $50,459.

D. $51,200.

E. $52,100.

Feedback: The 50 basis point servicing fee is deducted from the pool coupon, and payment recalculated:

I = 0.09 - 0.005 = 0.085 or 0.0070833 monthly

125. Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through security. The face value of each mortgage is $100,000 paying 180 monthly interest and principal payments at a fixed rate of 9 percent per annum.

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.) 

A. $4,892,200.

B. $5,000,000.

C. $5,152,189.

D. $5,477,910.

E. $5,675,005.

Feedback: Present value of an ordinary annuity
New market rate of interest = 7/12 = 0.58333 monthly

126. The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $50 million and pays 6 percent annually. Tranche B has a face value of $50 million and pays 8 percent annually. All mortgages have maturities of 30 years.

What are the annual payments promised to Tranche A and Tranche B, respectively, assuming no prepayments and non-amortization? 

A. $3,632,446; $4,000,000.

B. $4,000,000; $3,000,000.

C. $3,000,000; $4,000,000.

D. $3,632,446; $4,441,372.

E. $4,441,372; $3,632,446.

Feedback: Due to the non-amortizing principal, the payment is face value times coupon

127. The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $50 million and pays 6 percent annually. Tranche B has a face value of $50 million and pays 8 percent annually. All mortgages have maturities of 30 years.

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? 

A. $5,558,628; $4,441,372.

B. $4,441,372; $5,558,868.

C. $4,000,000; $6,000,000.

D. $6,000,000; $4,000,000.

E. $5,558,628; $4,000,000.

Feedback:

128. The following information is for a collateralized mortgage obligation (CMO). Tranche A has a face value of $50 million and pays 6 percent annually. Tranche B has a face value of $50 million and pays 8 percent annually. All mortgages have maturities of 30 years.

What are the principals outstanding on Tranches A and B, respectively, after the CMO distributes the $10 million of cash flows? 

A. $50 million; $47 million.

B. $47 million; $50 million.

C. $48 million; $48 million.

D. $50 million; $48 million.

E. $50 million; $50 million.

Feedback: