标题: Reading 57: Mortgage-Backed Sector of the Bond Market-LOS f [打印本页]
作者: 土豆妮 时间: 2011-3-23 14:22 标题: [2011]Session 15-Reading 57: Mortgage-Backed Sector of the Bond Market-LOS f
Session 15: Fixed Income: Structured Securities
Reading 57: Mortgage-Backed Sector of the Bond Market
LOS f: Explain the factors that affect prepayments and the types of prepayment risks.
Which of the following mortgage loan characteristics least likely affects prepayments?
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A) |
reputation of the lender with the agencies (e.g., Fannie Mae, Ginnie Mae). | |
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B) |
original mortgage rate. | |
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C) |
type of loan (e.g., 30-year fixed rate, 15-year variable). | |
The reputation of the lender does not affect prepayments.
作者: 土豆妮 时间: 2011-3-23 14:22
Which of the following most accurately describes prepayments?
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A) |
A payment made in excess of the monthly mortgage payment. | |
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B) |
A payment that pays the mortgage in full prior to maturity. | |
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C) |
Prepayment occurs if both interest and principal are paid before the end of the mortgage term. | |
It is possible for a mortgage borrower to pay an amount in excess of the required payment or even to pay off the loan entirely. Payments in excess of the required monthly amount are called prepayments.
作者: 土豆妮 时间: 2011-3-23 14:23
Prepayments or curtailments:
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A) |
cause the duration of the original mortgage to lengthen or increase. | |
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B) |
will reduce the amount of interest the lender receives over the life of the loan. | |
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C) |
will increase the amount of interest the lender receives over the life of the loan. | |
Prepayments or curtailments will reduce the amount of interest the lender receives over the life of the loan.
作者: 土豆妮 时间: 2011-3-23 14:23
Identify three risks associated with investing in mortgage-backed securities (MBS). Risks associated with investing in MBS are:
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A) |
interest rate risk, default risk, and prepayment risk. | |
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B) |
interest rate risk, contraction risk, and servicing fee risk. | |
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C) |
extension risk, credit risk, and downgrade risk. | |
A mortgage is a loan that is collateralized with a specific piece of real property, either residential or commercial. The borrower must make a series of mortgage payments over the life of the loan, and the lender has the right to “foreclose” or lay claim against the real estate in the event of a loan default. An MBS represents a claim against a pool of mortgages. The cash flows from the pool are distributed amongst the holders of all the MBS as per the terms of the issue.
Risks associated with investment in MBS:
- Interest rate risk?changes in the value of the MBS as interest rates change (usually inverse).
- Default risk?risk that some or all of the borrowers default and the collateral is not enough to cover the entire mortgage.
- Prepayment risk?risk that the borrowers prepay as interest rates decline.
作者: 土豆妮 时间: 2011-3-23 14:23
Which of the following factors does NOT affect prepayments?
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C) |
Characteristics of the underlying mortgage pool. | |
Defeasance is a type of call protection used in commercial loans.
作者: 土豆妮 时间: 2011-3-23 14:23
Which of the following best describes how a growing economy can affect prepayments? A growing economy:
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A) |
leads to increasing prepayments. | |
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B) |
does not affect prepayments. | |
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C) |
leads to decreasing prepayments. | |
The reason for this link is as follows: A growing economy leads to a rise in personal income and opportunities for worker migration and mobility. This results in higher housing turnover and therefore increasing prepayment rates.
作者: 土豆妮 时间: 2011-3-23 14:24
Which of the following best describes prepayment risk?
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A) |
The lender's interest rate risk resulting from prepayments. | |
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B) |
The risk associated with the unknown amount and timing of cash flow's resulting from prepayments. | |
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C) |
The lender's spread risk resulting from prepayments. | |
Mortgage prepayments reduce the amount of interest the lender receives over the life of the loan. The likelihood of this situation actually occurring is very real and is known as prepayment risk.
作者: 土豆妮 时间: 2011-3-23 14:24
Payments in excess of the required monthly payment amount are called:
Payments in excess of the required monthly payment amount are called prepayments.
作者: 土豆妮 时间: 2011-3-23 14:24
Prepayments cause the timing and amount of cash flows from mortgage loans and mortgage-backed securities (MBS) to be uncertain. Thus:
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A) |
the rate of prepayments is important to valuing the passthrough securities but is impossible to estimate. | |
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B) |
the analyst must make specific assumptions about the rate at which prepayments of the pooled mortgages occurs when valuing the passthrough securities. | |
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C) |
regulators mandate the convention firms must use when estimating prepayment rates. | |
The analyst must make specific assumptions about the rate at which prepayments of the pooled mortgages occur when valuing the passthrough securities.
作者: 土豆妮 时间: 2011-3-23 14:25
Which of the following best describes the relationship between the MBS passthrough and CMO and an ABS paythrough? An ABS paythrough structure is:
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A) |
created from an ABS passthrough structure in the same way a CMO is created from an MBS passthrough. | |
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B) |
similar to an MBS passthrough security except when using non-agency-based mortgages as collateral. | |
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C) |
created directly from the underlying loans unlike the way a CMO is created from an MBS passthrough. | |
A CMO is a paythrough structure. A pool of passthrough securities serves as collateral for CMO paythrough securities. In the ABS market, once the loans are pooled, either passthrough or paythrough securities may be issued – it is not necessary to first create passthroughs when creating a paythrough structure for an ABS. (Study Session 15, LOS 55.g)
An investor who wants to avoid extension risk wishes to purchase securities from one of the ABS tranches listed above. Which of the following is the most appropriate choice for inclusion in his portfolio?
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A) |
The senior tranche from the loan detailed above. | |
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B) |
An equal allocation to the senior tranche and each of the subordinated tranches from the loan detailed above. | |
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C) |
Subordinated tranche 3 from the loan detailed above. | |
Investors with short time horizons and a need for current income wish to avoid extension risk. The senior tranche from the above loan pool offers a chance to collect high prepayments during the first several years (see table 3). The subordinated tranches are protected from contraction risk in the early years, and do not meet the investor’s needs. (Study Session 15, LOS 55.g)
Suppose all of the securities in Table 1 were backed by auto loans. Which of the following statements most accurately describes the difference, if any, in prepayment characteristics of auto loans versus mortgages? Prepayments on auto loans:
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A) |
rarely occur, since auto loans traditionally have short maturities and low interest rates. | |
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B) |
occur frequently, but are rarely affected by refinancing. | |
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C) |
are affected by the same factors as mortgage prepayments. | |
Car loans tend to balances that are small enough so that the benefits from refinancing are small. Auto-loan prepayments occur whenever a car is sold, traded in, or wrecked—all of which are relatively frequent occurrences. Consequently, they are not affected by all the same underlying factors as mortgage loans. (Study Session 15, LOS 56.e)
Based on the information in the tables above, which investment offers the most protection against default?
Loan group 4 has the highest excess servicing spread (9.20 ? 8.20 ? 0.50 = 0.50 or 50 bp excess servicing spread), which allows for the largest reserves against losses. The tranches offer protection against expansion or contraction risk, but probably have similar characteristics in terms of default risk. (Study Session 15, LOS 56.d)
作者: 土豆妮 时间: 2011-3-23 14:27
Which of the following is the best definition of extension risk? The adverse consequences of:
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A) |
lower prepayment rates. | |
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B) |
increasing interest rates on passthrough securities. | |
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C) |
declining interest rates on passthrough securities. | |
Increasing interest rates will slow prepayments resulting in extending the maturity of the passthrough. This reduces the amount available to be invested at the currently high interest rates.
作者: 土豆妮 时间: 2011-3-23 14:28
Which of the following is the best definition of contraction risk? The adverse consequences of:
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A) |
lower prepayment rates. | |
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B) |
expected prepayment rates. | |
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C) |
declining interest rates on passthrough securities. | |
A decrease in interest rates will give borrowers an incentive to prepay the loan and refinance the debt at a lower rate. Therefore, the maturity of the passthrough will contract. The second adverse consequence is that the cash flows resulting from prepayments have to be reinvested at a lower interest rate.
作者: 土豆妮 时间: 2011-3-23 14:28
Which of the following statements is least accurate regarding prepayment risk?
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A) |
Contraction risk refers to the shortening of the expected life of the mortgage pool due to falling interest rates. | |
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B) |
Reinvestment rate risk is a result of rising interest rates. | |
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C) |
Investor in mortgage-backed securities must reinvest at lower rates when rates fall and borrowers prepay and are "stuck" with lower rates when rates rise and borrowers hold onto their mortgages. | |
Reinvestment rate risk is a result of falling interest rates, not rising rates.
作者: 土豆妮 时间: 2011-3-23 14:28
All of the following are factors that affect prepayments EXCEPT:
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B) |
characteristics of underlying mortgage loans. | |
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C) |
the amount of overall mortgage loan activity in the market. | |
The amount of overall mortgage activity does not impact prepayments.
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