Reading 58: LOS b ～ Q1- 3 mortgage, following, describes, class, security

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

A)   A participation certificate in a pool of mortgages.

B)   An option on a pool of mortgages.

C)   A futures contract on a pool of mortgages of a certain type.

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

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

A)   Selling an entire mortgage to another investor.

B)   Selling shares of one mortgage to other investors.

C)   Offsetting the mortgage payments by an investment that generates exactly the same cash flows.

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

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

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

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

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

D)   Passthrough securities convert illiquid mortgages into liquid securities.

spaceedu

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

A)   A participation certificate in a pool of mortgages.

B)   An option on a pool of mortgages.

C)   A futures contract on a pool of mortgages of a certain type.

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

The correct answer was 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.

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

A)   Selling an entire mortgage to another investor.

B)   Selling shares of one mortgage to other investors.

C)   Offsetting the mortgage payments by an investment that generates exactly the same cash flows.

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

The correct answer was D)

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.

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

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

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

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

D)   Passthrough securities convert illiquid mortgages into liquid securities.

The correct answer was B)

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.