LOS b: Illustrate the investment characteristics, payment characteristics, and risks of mortgage passthrough securities.

Q1. Regarding mortgage passthrough securities, which of the following statements is FALSE?

A)   Passthrough security investors receive the monthly cash flows generated by the underlying pool of mortgages less any servicing and guarantee/insurance fees.

B)   The passthrough coupon rates are less than the average coupon rate of the underlying mortgages in the pool.

C)   The passthrough coupon rates are greater than the average coupon rate of the underlying mortgages in the pool.

Q2. Which of the following most accurately describes the term "securitizing a mortgage"?

A)   Including a mortgage in a pool of mortgages that is used as collateral for a mortgage passthrough security.

B)   Selling shares of one mortgage to other investors.

C)   Selling an entire mortgage to another investor.

Q3. Which of the following most accurately describes a mortgage passthrough security?

A)   A participation certificate in a pool of mortgages.

B)   A security that pays off the full amount of the mortgage if the borrower defaults.

C)   An option on a pool of mortgages.

LOS b: Illustrate the investment characteristics, payment characteristics, and risks of mortgage passthrough securities. fficeffice" />

Q1. Regarding mortgage passthrough securities, which of the following statements is FALSE?

A)   Passthrough security investors receive the monthly cash flows generated by the underlying pool of mortgages less any servicing and guarantee/insurance fees.

B)   The passthrough coupon rates are less than the average coupon rate of the underlying mortgages in the pool.

C)   The passthrough coupon rates are greater than the average coupon rate of the underlying mortgages in the pool.

Correct answer is C)

The passthrough coupon rates are less than the average coupon rate of the underlying mortgages in the pool (due to servicing fees), not greater than the coupon rate.

Q2. Which of the following most accurately describes the term "securitizing a mortgage"?

A)   Including a mortgage in a pool of mortgages that is used as collateral for a mortgage passthrough security.

B)   Selling shares of one mortgage to other investors.

C)   Selling an entire mortgage to another investor.

Correct answer is A)

A mortgage passthrough security represents a claim against a pool of mortgages. Any number of mortgages may be used to form the pool, and any mortgage included in the pool is referred to as a securitized mortgage. Passthrough securities may be traded in the secondary market, and, as such they effectively convert illiquid mortgages into liquid securities. This process is called securitization.

Q3. Which of the following most accurately describes a mortgage passthrough security?

A)   A participation certificate in a pool of mortgages.

B)   A security that pays off the full amount of the mortgage if the borrower defaults.

C)   An option on a pool of mortgages.

Correct answer is A)

A mortgage passthrough security represents a claim against a pool of mortgages. Any number of mortgages may be used to form the pool, and any mortgage included in the pool is referred to as a securitized mortgage.

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