LOS d: Describe the types and characteristics of securities issued by U.S. federal agencies.

Q1. The most popular form of credit enhancement is the senior-subordinated structure. What does the senior-subordinated collateral structure shown below indicate?

Senior tranche:  $560 million        Subordinated tranche:   $40 million

A)   The first $40 million of losses are absorbed by the subordinated tranche.

B)   The subordinated tranche investor receives $40 million in repayment first. Then the cash flow goes to the senior tranche.

C)   The subordinated tranche is protected by the senior tranche.

Q2. A debenture is:

A)   an unsecured bond.

B)   a short-term debt.

C)   a bond secured by specific assets.

Q3. Which of the following institutions are federally-related institutions?

A)   Government National Mortgage Association.

B)   Student Loan Marketing Association.

C)   Federal National Mortgage Association.

Q4. Which of the following institutions is NOT a government-sponsored enterprise (GSE)?

A)   Federal Farm Credit System.

B)   Student Loan Marketing Association.

C)   Government National Mortgage Association.

Q5. A mortgage-backed security has the following characteristics:

• It was created by pooling a collection of more than a thousand mortgages
• Not all investors face the same prepayment risk
• Investors receive three distinct kinds of cash flows
• Freddie Mac issued the security

This security is a(n):

A)   agency debenture.

B)   mortgage passthrough security.

C)   collateralized mortgage obligation.

Q6. Which of the following institutions has debt that is backed by the full faith and credit of the U.S. government?

A)   Federal Home Loan Mortgage Association.

B)   Government National Mortgage Association (Ginnie Mae).

C)   Student Loan Marketing Association.

LOS d: Describe the types and characteristics of securities issued by ffice:smarttags" />U.S. federal agencies.fficeffice" />

Q1. The most popular form of credit enhancement is the senior-subordinated structure. What does the senior-subordinated collateral structure shown below indicate?

Senior tranche:  $560 million        Subordinated tranche:   $40 million

A)   The first $40 million of losses are absorbed by the subordinated tranche.

B)   The subordinated tranche investor receives $40 million in repayment first. Then the cash flow goes to the senior tranche.

C)   The subordinated tranche is protected by the senior tranche.

Correct answer is A)

The loss of $40 million is applied to the subordinated tranche first and since it is large enough to absorb the entire loss, all $40 million is applied to the subordinated tranche.

Q2. A debenture is:

A)   an unsecured bond.

B)   a short-term debt.

C)   a bond secured by specific assets.

Correct answer is A)

A debenture by definition is unsecured debt.

Q3. Which of the following institutions are federally-related institutions?

A)   Government National Mortgage Association.

B)   Student Loan Marketing Association.

C)   Federal National Mortgage Association.

Correct answer is A)

Federally-related (or government-owned) agencies are arms of the federal government. Both of the other institutions listed are government-sponsored enterprises.

Q4. Which of the following institutions is NOT a government-sponsored enterprise (GSE)?

A)   Federal Farm Credit System.

B)   Student Loan Marketing Association.

C)   Government National Mortgage Association.

Correct answer is C)

Federally-related (or government-owned) agencies are arms of the federal government. Both of the other institutions listed are government-sponsored enterprises.

Q5. A mortgage-backed security has the following characteristics:

• It was created by pooling a collection of more than a thousand mortgages
• Not all investors face the same prepayment risk
• Investors receive three distinct kinds of cash flows
• Freddie Mac issued the security

This security is a(n):

A)   agency debenture.

B)   mortgage passthrough security.

C)   collateralized mortgage obligation.

Correct answer is C)

While most mortgage-backed securities pay three types of cash flows, only mortgage passthroughs and collateralized mortgage obligations (CMOs) are formed by pooling mortgages. Only CMOs divide investors into tranches with different cash flows and risk profiles. Debentures are securities not backed by collateral.

Q6. Which of the following institutions has debt that is backed by the full faith and credit of the U.S. government?

A)   Federal Home Loan Mortgage Association.

B)   Government National Mortgage Association (Ginnie Mae).

C)   Student Loan Marketing Association.

Correct answer is B)

The Government National Mortgage Association is the only item listed that is backed by the full faith and credit of the U.S. government.

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