Reading 55: Mortgage-Backed Sector of the Bond Market-LOS a mortgage, center, payment, 2010

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Session 15: Fixed Income: Structured Securities
Reading 55: Mortgage-Backed Sector of the Bond Market

LOS a: Describe a mortgage loan and illustrate the cash flow characteristics of a fixed-rate, level payment, and fully amortized mortgage loan.

 

 

 

Regarding a fixed-rate, level payment, and fully amortized mortgage loan, which of the following statements is FALSE?

A) Payments are equal over the life of the loan.

B) Principal repayment falls as interest payments rise over the life of the loan.

C) Interest payments fall as principal payments rise over the life of the loan.

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Interest payments fall as principal payments rise over the life of the loan, not the other way around.

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Which of the following statements regarding mortgages is FALSE?

A) Because mortgages are secured loans, mortgage insurance is unnecessary.

B) Mortgages are collateralized by a piece of real property, either residential or commercial.

C) In a conventional mortgage, the loan is based on the creditworthiness of the borrower.

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Mortgage insurance is often required, depending on the creditworthiness of the borrower or the amount of equity in the loan.

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Which of the following most accurately describes the cash flows of a fixed rate, level payment, fully amortized mortgage loan?

A) The borrower pays equal percentage installments over the term of the mortgage.

B) The mortgage is amortized in the final payment as in corporate debt.

C) The borrower pays equal installments over the term of the mortgage.

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A fixed rate, level payment, fully amortized mortgage loan requires equal payments (usually monthly) over the life of the mortgage. Each of these payments consists of an interest component and a principal component.

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Which of the following is a characteristic of a fixed rate, level payment, fully amortized mortgage loan?

A) The payments are such that at the end of the mortgage, the loan has been fully amortized.

B) Each payment includes interest on the borrowed amount only.

C) Each payment includes an equal portion of interest and amortized principal.

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As time passes, the proportion of the equal monthly mortgage payment that represents interest decreases and the proportion that goes toward the repayment of principal increases. This process continues until the outstanding principal reaches zero and the loan is paid in full (fully amortized).

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Which of the following is a characteristic of a mortgage loan?

A) A very risky loan since it is unsecured.

B) If the borrower defaults on the loan, the lender has the right to seize the collateral.

C) If the borrower defaults on the loan, the lender has the right to seize all assets of the borrower to ensure that the loan is paid off.

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With a mortgage loan, 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 loan default.

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Which of the following most accurately describes a mortgage loan?

A) A commercial loan secured by the collateral of some specified real estate property.

B) An unsecured loan to enable the borrower to finance a real estate property.

C) A loan secured by the collateral of some specified real estate property.

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A mortgage is a loan that is collateralized with a specific piece of real property, either residential or commercial.

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What is curtailment in relation to a mortgage?

A) Prepayments of a mortgage for less than the full amount.

B) Prepayments of a mortgage for the entire amount.

C) Payments that come in slower than expected.

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Curtailments are prepayments of mortgages for less than the full amount.