Reading 64: Overview of Bond Sectors and Instruments - LO

答案和详解如下：

1.Paul Blackburn is describing mortgage backed securities and makes the following statements:

Statement 1: A mortgage passthrough security is formed by pooling a large number of mortgages and issuing certificates that represent ownership shares in the pool. Because each mortgage borrower has the right to prepay the mortgage, the value of a passthrough security behaves as if the security has an embedded put feature.

Statement 2: A collateralized mortgage obligation with sequential tranches is created by pooling mortgage passthrough certificates. Securities are issued in different tranches that have proportionate claims on the cash flows from the passthrough certificates.

Are Blackburn’s statements correct?

A)                                        Correct  Correct

B)                                        Correct  Incorrect

C)                                        Incorrect       Incorrect

D)                                        Incorrect       Correct

The correct answer was C)

Statement 1 is incorrect. A borrower who prepays a mortgage is in effect exercising a call option, similar to a corporate bond issuer who calls a bond and prepays the principal. Therefore the pool of mortgages and the securities created from it behave as if they had an embedded call feature.

Statement 2 is also incorrect. Sequential tranches issued as a collateralized mortgage obligation do not have proportionate claims on the cash flows from the pool. Instead they have sequential claims. The shortest-term tranche receives principal and interest payments until it is paid off. The cash flows then go to the second tranche until it is paid off, and so on. This structure allows securities with different timing and risk profiles to be issued from the same pool of certificates.

2.Which of the following is the least significant risk faced by a holder of a mortgage-backed security?

A)    Interest rate risk.

B)    Scheduled principal payment risk.

C)    Prepayment risk.

D)    Reinvestment risk.

The correct answer was B)

Interest rate risk, prepayment risk and reinvestment risk are all significant for mortgage-backed securities. There is no risk embedded in a scheduled principal payment.

3.Which of the following is least likely a cash flow that results from a mortgage-backed security?

A)    Net interest.

B)    Scheduled principal payments.

C)    Mortgage processing fees and charges.

D)    Prepayments.

The correct answer was C)

Mortgage processing fees and charges are deducted before interest and principal payments are passed through.