cyber21

Which of the following is the best explanation of a conditional prepayment rate? The conditional prepayment rate is the:

A) prepayment rate assumed for a pool based on the characteristics of the pool and the economic environment.

B) percentage of the total liability that a borrower prepays conditional on the fact that he prepays.

C) realized prepayment rate of a pool.

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The conditional prepayment rate convention for describing the pattern of prepayments and the cash flow of a passthrough assumes that some fraction of the remaining principal in the pool is pre-paid each month for the remaining term of the mortgage. The rate is influenced by the economic environment and the characteristics of the mortgage pool.

cyber21

Which of the following is a CORRECT description of the Public Securities Association (PSA) prepayment benchmark? The PSA prepayment benchmark assumes that prepayment rates are:

A) high for newly originated mortgages and then will lower as the mortgages become seasoned.

B) low during high-interest rate periods and high during low-interest rate periods.

C) low for newly originated mortgages and then will speed up as the mortgages season.

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The PSA prepayment benchmark assumes that the monthly prepayment rate for a mortgage pool increases as it ages (becomes seasoned).  PSA is expressed as a monthly series of CPRs.  The PSA standard benchmark is referred to as 100% PSA (or just 100 PSA), which assumes the following graduated CPRs for 30-year mortgages:

• CPR = 0.2% for the first month, increasing by 0.2% per month up to 30 months
• CPR = 6% for months 30 - 360

cyber21

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.

cyber21

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.

cyber21

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.

cyber21

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 know to the investor beforehand.

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

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.

cyber21

Which of the following mortgage loan characteristics least likely affects prepayments?

A) original mortgage rate.

B) type of loan (e.g., 30-year fixed rate, 15-year variable).

C) reputation of the lender with the agencies (e.g., Fannie Mae, Ginnie Mae).

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The reputation of the lender does not affect prepayments.

cyber21

Which of the following most accurately describes prepayments?

A) A payment that pays the mortgage in full prior to maturity.

B) A payment made in excess of the monthly mortgage payment.

C) Prepayment occurs if both interest and principal are paid before the end of the mortgage term.

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It is possible for a mortgage borrower to pay an amount in excess of the required payment or even to pay off the loan entirely. Payments in excess of the required monthly amount are called prepayments.

cyber21

Prepayments or curtailments:

A) cause the duration of the original mortgage to lengthen or increase.

B) will increase the amount of interest the lender receives over the life of the loan.

C) will reduce the amount of interest the lender receives over the life of the loan.

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Prepayments or curtailments will reduce the amount of interest the lender receives over the life of the loan.

cyber21

Identify three risks associated with investing in mortgage-backed securities (MBS). Risks associated with investing in MBS are:

A) interest rate risk, contraction risk, and servicing fee risk.

B) interest rate risk, default risk, and prepayment risk.

C) extension risk, credit risk, and downgrade risk.

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A mortgage is a loan that is collateralized with a specific piece of real property, either residential or commercial. 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 a loan default. An MBS represents a claim against a pool of mortgages. The cash flows from the pool are distributed amongst the holders of all the MBS as per the terms of the issue.
Risks associated with investment in MBS:

• Interest rate risk−changes in the value of the MBS as interest rates change (usually inverse).
• Default risk−risk that some or all of the borrowers default and the collateral is not enough to cover the entire mortgage.
• Prepayment risk−risk that the borrowers prepay as interest rates decline.