Reading 56: Mortgage-Backed Sector of the Bond Market Los e~Q

mortgage, relevant, security, average, always

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

Q1. 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.

Q2. 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) both scheduled principal payments and expected prepayments.

C) scheduled principal payments.

Q3. 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.

Q4. 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) does not take interest rate risk into account.

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

[2009]Session15-Reading 56: Mortgage-Backed Sector of the Bond Market Los e~Q

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

Q1. 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.

Correct answer is B)

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

Q2. 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) both scheduled principal payments and expected prepayments.

C) scheduled principal payments.

Correct answer is B)

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

Q3. 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.

Correct answer is C)

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.

Q4. 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) does not take interest rate risk into account.

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

Correct answer is C)