Reading 57: Mortgage-Backed Sector of the Bond Market-LOS e 2011, mortgage, relevant, security, average

土豆妮

Session 15: Fixed Income: Structured Securities
Reading 57: Mortgage-Backed Sector of the Bond Market

LOS e: Explain why the average life of a mortgage-backed security is more relevant than the security's maturity.

 

 

The stated maturity of a mortgage passthrough security is:

A) will always be longer than its true life.

B) unlikely to equal its true life.

C) will always be shorter than its true life.

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The stated maturity of a mortgage passthrough security is unlikely to equal its true life.

土豆妮

The average life of a mortgage-backed security (MBS) is a more relevant measure than a security’s maturity. It represents the average time to receipt of:

A) expected prepayments.

B) scheduled principal payments.

C) both scheduled principal payments and expected prepayments.

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The average life of an MBS represents the average time to receipt of both scheduled principal payments and expected prepayments.

土豆妮

Which of the following is a reason why the average life of a mortgage-backed security is a more relevant measure than the security's maturity? The average life:

A) takes interest rate risk into account.

B) takes the economic environment into account.

C) takes into account the assumed prepayment rate.

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The stated maturity of a mortgage passthrough security is unlikely to equal its true life because of prepayments. Average life is used because it represents the average time to receipt of both scheduled principal payments and expected prepayments.

土豆妮

Which of the following is a reason why the stated maturity of a mortgage passthrough security is not as relevant as the average life measure? The security's maturity:

A) is not related to the remaining life of the underlying loans and the assumed prepayment rate.

B) is not know to the investor beforehand.

C) does not take interest rate risk into account.

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The stated maturity of a mortgage passthrough security is unlikely to equal its true life because of prepayments. Average life is used because it represents the average time to receipt of both scheduled principal payments and expected prepayments.