1．Prepayment burnout in a mortgage-backed security (MBS) refers to the fact that:

A)   some tranches will experience extreme rates of prepayment.

B)   investors will shun MBS when prepayment rates are severe.

C)   in the later years of a downward trend in interest rates, less mortgages will be refinanced.

D)   eventually a MBS will exceed the maximum prepayments allowed when interest rates drop too low.

2．Assume that interest rates in the year 2010 decrease below historical averages. They continue their downward trend for years 2011 and 2012. In which year would a MBS be least likely to be experience high rates of prepayment?

A)   2010.

B)   2012.

C)   2011.

D)   2013.

3.Which of the following statements regarding a mortgage-backed security (MBS) is TRUE?

A)   Path dependency means that MBS prices tend to follow a trend.

B)   Prepayment rates for a tranche of a MBS are independent of other MBS tranches.

C)   Backward induction methodology is useful for valuing MBS.

D)   Binomial models should not be used for MBS because of path dependency.

答案和详解如下：

1．Prepayment burnout in a mortgage-backed security (MBS) refers to the fact that:

A)   some tranches will experience extreme rates of prepayment.

B)   investors will shun MBS when prepayment rates are severe.

C)   in the later years of a downward trend in interest rates, less mortgages will be refinanced.

D)   eventually a MBS will exceed the maximum prepayments allowed when interest rates drop too low.

The correct answer was C)

In a MBS, whether a mortgage is called depends on the path of previous interest rates. If rates have been on a downward trend, then fewer mortgages will be refinanced as the trend continues because homeowners that have wanted to refinance will have already done so. Prepayment burnout means that eventually mortgage refinancing will slow in the later stages of a downward trend in interest rates.

2．Assume that interest rates in the year 2010 decrease below historical averages. They continue their downward trend for years 2011 and 2012. In which year would a MBS be least likely to be experience high rates of prepayment?

A)   2010.

B)   2012.

C)   2011.

D)   2013.

The correct answer was B)

In a mortgage-backed security (MBS), whether a mortgage is called depends on the path of previous interest rates. If rates have been on a downward trend, then fewer mortgages will be refinanced as the trend continues because homeowners that have wanted to refinance will have already done so. Thus fewer mortgages will be refinanced in the year 2012 than in the earlier years.

3.Which of the following statements regarding a mortgage-backed security (MBS) is TRUE?

A)   Path dependency means that MBS prices tend to follow a trend.

B)   Prepayment rates for a tranche of a MBS are independent of other MBS tranches.

C)   Backward induction methodology is useful for valuing MBS.

D)   Binomial models should not be used for MBS because of path dependency.

The correct answer was D)

In a MBS, whether a mortgage is called depends on the path of previous interest rates. If rates had been low previously, then mortgages are less likely to be called later on. Thus a binomial model that uses backward induction methodology (later outcomes are determined first) should not be used to value MBS. Prepayment rates are dependent on the history of interest rate changes. Furthermore, the prepayment in a tranche depends on the principal balance in other tranches, which in turn depends on their prepayment histories.