Regarding a fixed-rate, level payment, and fully amortized mortgage loan, which of the following statements is least accurate?
A)
Principal repayment falls as interest payments rise over the life of the loan.
B)
Payments are equal over the life of the loan.
C)
Interest payments fall as principal payments rise over the life of the loan.
Interest payments fall as principal payments rise over the life of the loan, not the other way around.作者: ShooterMcCFA 时间: 2012-4-2 17:52
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.
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).作者: ShooterMcCFA 时间: 2012-4-2 17:52
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 all assets of the borrower to ensure that the loan is paid off.
C)
If the borrower defaults on the loan, the lender has the right to seize the collateral.
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.作者: ShooterMcCFA 时间: 2012-4-2 17:53
Which of the following most accurately describes a mortgage loan?
A)
A loan secured by the collateral of some specified real estate property.
B)
A commercial loan secured by the collateral of some specified real estate property.
C)
An unsecured loan to enable the borrower to finance a real estate property.
A mortgage is a loan that is collateralized with a specific piece of real property, either residential or commercial.作者: ShooterMcCFA 时间: 2012-4-2 17:53
What is curtailment in relation to a mortgage?
A)
Prepayments of a mortgage for the entire amount.
B)
Payments that come in slower than expected.
C)
Prepayments of a mortgage for less than the full amount.
Curtailments are prepayments of mortgages for less than the full amount.作者: ShooterMcCFA 时间: 2012-4-2 17:54
Which of the following statements regarding mortgages is least accurate?
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.
Mortgage insurance is often required, depending on the creditworthiness of the borrower or the amount of equity in the loan.作者: ShooterMcCFA 时间: 2012-4-2 17:54
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 borrower pays equal installments over the term of the mortgage.
C)
The mortgage is amortized in the final payment as in corporate debt.
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.作者: ShooterMcCFA 时间: 2012-4-2 17:55
Regarding mortgage passthrough securities, which of the following statements is least accurate?
A)
The passthrough coupon rates are greater than the average coupon rate of the underlying mortgages in the pool.
B)
Passthrough security investors receive the monthly cash flows generated by the underlying pool of mortgages less any servicing and guarantee/insurance fees.
C)
The passthrough coupon rates are less than the average coupon rate of the underlying mortgages in the pool.
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.作者: ShooterMcCFA 时间: 2012-4-2 17:56
Which of the following most accurately describes the term "securitizing a mortgage"?
A)
Selling shares of one mortgage to other investors.
B)
Including a mortgage in a pool of mortgages that is used as collateral for a mortgage passthrough security.
C)
Selling an entire mortgage to another investor.
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.作者: ShooterMcCFA 时间: 2012-4-2 17:56
Which of the following most accurately describes a mortgage passthrough security?
A)
A participation certificate in a pool of mortgages.
B)
A security that pays off the full amount of the mortgage if the borrower defaults.
C)
An option on a pool of mortgages.
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.作者: ShooterMcCFA 时间: 2012-4-2 17:56
Given a single monthly mortality rate (SMM) of 0.45%, a mortgage pool with a $200,000 principal balance outstanding at the beginning of the 26th month, and a scheduled monthly principal payment of $60.00 for the 26th month, the estimated prepayment is:
Suppose that the single-monthly mortality rate (SMM) is equal to 0.004. The mortgage balance for a certain month is $100 million, and the scheduled principal payment for the same month is $2.5 million. What is the assumed prepayment amount for this month?
A)
$960,000.
B)
$460,000.
C)
$390,000.
The prepayment amount is computed as follows:
Prepayment amount = SMM × (beginning mortgage balance for a month − scheduled principal payment for the month) = 0.004 × ($100 million − $2.5 million) = $390,000.作者: ShooterMcCFA 时间: 2012-4-2 17:57
Suppose that the single-monthly mortality rate (SMM) is equal to 0.003. The mortgage balance for a certain month is $250 million, and the scheduled principal payment for the same month is $3 million. What is the assumed prepayment amount for this month?
A)
$356,000.
B)
$672,000.
C)
$741,000.
The prepayment amount is computed as follows:
Prepayment amount = SMM x (beginning mortgage balance for a month - scheduled principal payment for the month) = 0.003 × ($250 million − $3 million) = $741,000.作者: ShooterMcCFA 时间: 2012-4-2 17:58
Paul Advani, an unemployed telecommunications analyst, is scheduled to interview tomorrow with Manish Preeh, managing partner of the mortgage-banking division of Robust Investors. Since Advani has not worked in mortgage banking and his knowledge of the field is somewhat rusty, he asks to borrow a friend’s Level II CFA Study Notes so he can prepare for the interview.
After a brief introduction and a discussion of Advani’s resume, Preeh tells Advani he is concerned about the candidate’s familiarity with the industry. Preeh asks Advani a series of questions to test his knowledge.
Preeh begins with a question about prepayment rates and benchmarks. He asks Advani to name some conventions used as benchmarks for prepayment rates. Advani comes up with four benchmarks:
Conditional prepayment rates
Single monthly mortality (SMM) rates
Nonconforming mortgage rates
Public Securities Association (PSA) prepayment benchmarks
Then Preeh asks Advani to describe the use of excess servicing spreads as internal credit enhancements.
Preeh’s next question requires Advani to discuss reasons for using the stated maturity of a mortgage passthrough security versus using the average life measure. Advani responds that the security’s maturity is less valuable to bond analysis than is the average life measure.
Then Preeh turns the questions to Advani’s product knowledge. Preeh gives Advani four characteristics that allegedly apply to stripped mortgage-backed securities (MBS), then asks him which one of the characteristics is accurate. The characteristics are as follows:
Principal and interest are not allocated on a pro-rata basis.
Owners of these securities benefit from quick prepayments.
They pay significantly lower yields than their "whole" counterparts.
They are less volatile than the passthrough from which they were stripped.
Preeh proceeds to ask Advani how planned amortization class (PAC) bonds are protected against prepayment risk to create products that provide better asset and liability matching for institutional investors.
The interview ends with a question using the following data:
The single-monthly mortality rate (SMM) is equal to 0.003.
The mortgage balance for March is $250 million.
The scheduled principal payment is $3 million in March, and $3 million in April.
Which of the following characteristics best describes stripped MBS?
A)
Owners of these securities benefit from quick prepayments.
B)
Principal and interest are not allocated on a pro-rata basis.
C)
They are less volatile than the passthrough from which they were stripped.
Stripped MBS differ from conventional MBS in that principal and interest are not allocated on a pro-rata basis, because they come in two flavors, principal-only (PO) and interest-only (IO). PO and IO strips have different payment policies. Investors who buy interest-only strips want slow prepayments, as fast prepayments reduce the value of the cash flows. PO and IO strips are more volatile than the original security with both principal and interest payments. (Study Session 15, LOS 51.j) Which of the following statements regarding excess servicing spreads is most accurate? Excess serving spread accounts involve the allocation of:
A)
expenses into accounts for senior and subordinate tranches.
B)
the servicing fee into a separate reserve account.
C)
surplus cash into a separate reserve account.
Excess cash is paid into the excess servicing spread account in order to cover possible future losses. Servicing fees pay for services, not reserves against default risk. Excess servicing spreads have nothing to do with tranche structures. (Study Session 15, LOS 52.d) The estimated April prepayment is closest to:
A)
$732,000.
B)
$741,000.
C)
$729,777.
The prepayment amount is computed as follows:
Prepayment amount = SMM × (beginning mortgage balance for a month − scheduled principal payment for the month) = For March, the prepayment is 0.003 × ($250 million − $3 million) = $741,000.
For April, the starting mortgage balance is $250 million − $3 million − $741,000 = $246.259 million.
The prepayment is 0.003 × ($246.259 million − $3 million) = $729,777.
(Study Session 15, LOS 51.c)
Which of the following is least likely used as a benchmark for prepayment rates?
A)
SMM rates.
B)
Nonconforming mortgage rates.
C)
Conditional prepayment rates.
Two industry conventions have been adopted as benchmarks for prepayment rates:
the conditional prepayment rate, which is used to compute SMM.
the PSA prepayment benchmark.
(Study Session 15, LOS 51.d)
Which of the following responses to Preeh’s question about PAC bonds is most accurate? They:
A)
structure the PAC tranche so it has more contraction risk but less interest-rate risk than the support tranches.
B)
gain prepayment risk protection as their par value falls relative to that of the support tranche.
C)
accrue the interest for one tranche and redistribute it to the support tranches.
The PAC tranche has significant protection against prepayment risk at the expense of the support or companion tranches. The more the support tranche’s par value rises relative to that of the PAC bond, the better the protection against prepayment risk. PAC tranches are designed to deal with prepayment risk, and as such pass the contraction or extension risk onto the support tranches. PAC tranches can siphon interest slated for the support tranches, but do not redistribute it. In fact, PAC tranches are designed to provide a minimum guaranteed principal payment by collecting interest targeted for a support tranche when prepayments are low. (Study Session 15, LOS 51.h) Advani’s assertion that the maturity is a less-useful analytical tool than the average life measure of a mortgage passthrough security is:
A)
incorrect because the average life measure does not take interest-rate risk into account.
B)
correct because the maturity does not take into account the assumed prepayment rate.
C)
correct because the investor may not know the maturity, but can calculate the average life measure.
The stated maturity of a mortgage pass-through 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. The average life measure attempts to reflect changes in prepayment rates, and as such takes into account likely changes in interest rates or the economic climate. Because the average life measure is a better analytical tool than the stated maturity, the answer starting with “incorrect” is wrong. (Study Session 15, LOS 51.b)作者: ShooterMcCFA 时间: 2012-4-2 17:58
Which of the following is the best explanation of a single-monthly mortality rate? The single-monthly mortality rate is the:
A)
assumed monthly prepayment rate for a pool.
B)
assumed monthly prepayment rate for each individual loan.
C)
realized monthly prepayment rate for a pool.
The single-monthly mortality rate is equal to the conditional prepayment rate expressed on a monthly basis.作者: ShooterMcCFA 时间: 2012-4-2 18:00
Which of the following is the best explanation of a single-monthly mortality rate? The single-monthly mortality rate is the:
A)
assumed monthly prepayment rate for a pool.
B)
assumed monthly prepayment rate for each individual loan.
C)
realized monthly prepayment rate for a pool.
The single-monthly mortality rate is equal to the conditional prepayment rate expressed on a monthly basis.作者: ShooterMcCFA 时间: 2012-4-2 18:02
What is the relation between the PSA prepayment benchmark and the conditional prepayment rate (CPR)? The PSA prepayment benchmark is:
A)
expressed as an annual series of CPR's.
B)
expressed as a monthly series of CPR's.
C)
not related to the CPR.
The PSA prepayment benchmark is expressed as a monthly series of CPR's that increase over the life of the liabilities.作者: cyber21 时间: 2012-4-2 18:07
Which of the following statements regarding a conditional prepayment rate (CPR) is CORRECT? A CPR is the:
A)
annual prepayment expressed as a percentage of the amount at the beginning of the period.
B)
annual prepayment expressed as a percentage of the amount at the end of the period.
C)
monthly prepayment expressed as a percentage of the amount at the beginning of the period.
The CPR is the annual rate at which a mortgage pool balance is assumed to be prepaid during the life of the pool. The CPR for any given mortgage pool depends on characteristics such as past prepayment rates, along with the current and expected economic state of affairs. To convert the CPR into a monthly rate called the single-monthly mortality rate (SMM), the following formula applies: SMM = 1 – (1 – CPR)1/12.作者: cyber21 时间: 2012-4-2 18:08
Regarding prepayment rates, which of the following statements is least accurate?
A)
The conditional prepayment rate (CPR) is the assumed rate at which the mortgage pool balance is prepaid.
B)
The conditional prepayment rate (CPR) is the actual rate at which the mortgage pool balance is prepaid.
C)
If the conditional prepayment rate (CPR) is converted into a monthly rate, it is called the single monthly mortality rate (SMM).
CPR is the assumed rate at which the mortgage pool balance is prepaid, not the actual rate at which it is prepaid.作者: cyber21 时间: 2012-4-2 18:09
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.
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.作者: cyber21 时间: 2012-4-2 18:09
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.
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
作者: cyber21 时间: 2012-4-2 18:09
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.
The stated maturity of a mortgage passthrough security is unlikely to equal its true life.作者: cyber21 时间: 2012-4-2 18:10
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.
The average life of an MBS represents the average time to receipt of both scheduled principal payments and expected prepayments.作者: cyber21 时间: 2012-4-2 18:10
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.
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.作者: cyber21 时间: 2012-4-2 18:11
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.
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.作者: cyber21 时间: 2012-4-2 18:11
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).
The reputation of the lender does not affect prepayments.作者: cyber21 时间: 2012-4-2 18:12
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.
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.作者: cyber21 时间: 2012-4-2 18:12
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.
Prepayments or curtailments will reduce the amount of interest the lender receives over the life of the loan.作者: cyber21 时间: 2012-4-2 18:12
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.
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.
作者: cyber21 时间: 2012-4-2 18:13
Which of the following factors does NOT affect prepayments?
A)
Housing turnover.
B)
Defeasance.
C)
Characteristics of the underlying mortgage pool.
Defeasance is a type of call protection used in commercial loans.作者: cyber21 时间: 2012-4-2 18:13
Which of the following best describes how a growing economy can affect prepayments? A growing economy:
A)
leads to increasing prepayments.
B)
does not affect prepayments.
C)
leads to decreasing prepayments.
The reason for this link is as follows: A growing economy leads to a rise in personal income and opportunities for worker migration and mobility. This results in higher housing turnover and therefore increasing prepayment rates.作者: cyber21 时间: 2012-4-2 18:13
Which of the following best describes prepayment risk?
A)
The lender's interest rate risk resulting from prepayments.
B)
The lender's spread risk resulting from prepayments.
C)
The risk associated with the unknown amount and timing of cash flow's resulting from prepayments.
Mortgage prepayments reduce the amount of interest the lender receives over the life of the loan. The likelihood of this situation actually occurring is very real and is known as prepayment risk.作者: cyber21 时间: 2012-4-2 18:14
Payments in excess of the required monthly payment amount are called:
A)
mega-payments.
B)
prepayments.
C)
passthroughs.
Payments in excess of the required monthly payment amount are called prepayments.作者: cyber21 时间: 2012-4-2 18:14
Prepayments cause the timing and amount of cash flows from mortgage loans and mortgage-backed securities (MBS) to be uncertain. Thus:
A)
the analyst must make specific assumptions about the rate at which prepayments of the pooled mortgages occurs when valuing the passthrough securities.
B)
the rate of prepayments is important to valuing the passthrough securities but is impossible to estimate.
C)
regulators mandate the convention firms must use when estimating prepayment rates.
The analyst must make specific assumptions about the rate at which prepayments of the pooled mortgages occur when valuing the passthrough securities.作者: cyber21 时间: 2012-4-2 18:15
Which of the following is the best definition of extension risk? The adverse consequences of:
A)
increasing interest rates on passthrough securities.
B)
lower prepayment rates.
C)
declining interest rates on passthrough securities.
Increasing interest rates will slow prepayments resulting in extending the maturity of the passthrough. This reduces the amount available to be invested at the currently high interest rates.作者: cyber21 时间: 2012-4-2 18:15
Which of the following is the best definition of contraction risk? The adverse consequences of:
A)
lower prepayment rates.
B)
declining interest rates on passthrough securities.
C)
expected prepayment rates.
A decrease in interest rates will give borrowers an incentive to prepay the loan and refinance the debt at a lower rate. Therefore, the maturity of the passthrough will contract. The second adverse consequence is that the cash flows resulting from prepayments have to be reinvested at a lower interest rate.作者: cyber21 时间: 2012-4-2 18:15
Which of the following statements is least accurate regarding prepayment risk?
A)
Reinvestment rate risk is a result of rising interest rates.
B)
Contraction risk refers to the shortening of the expected life of the mortgage pool due to falling interest rates.
C)
Investor in mortgage-backed securities must reinvest at lower rates when rates fall and borrowers prepay and are "stuck" with lower rates when rates rise and borrowers hold onto their mortgages.
Reinvestment rate risk is a result of falling interest rates, not rising rates.作者: cyber21 时间: 2012-4-2 18:16
All of the following are factors that affect prepayments EXCEPT:
A)
seasoning.
B)
the amount of overall mortgage loan activity in the market.
C)
characteristics of underlying mortgage loans.
The amount of overall mortgage activity does not impact prepayments.作者: cyber21 时间: 2012-4-2 18:16
How is a collateralized mortgage obligation (CMO) created? A CMO is created by:
A)
redistributing the cash flows of mortgage-related products to different bond classes.
B)
eliminating prepayment risk.
C)
eliminating extension risk.
Creating CMO's distributes the various forms of prepayment risk among different classes of bondholders which allows the CMO to more closely satisfy the asset/liability needs of institutional investors.作者: cyber21 时间: 2012-4-2 18:16
Which of the following best describes how planned amortization class (PAC) bonds are protected against prepayment risk to create products that provide better asset and liability matching for institutional investors? PAC bonds:
A)
have a fixed principal repayment schedule that must be satisfied as long as the support tranches exist.
B)
accrue the interest for one tranche and redistribute it to the support tranches.
C)
have several different companion tranches to which repayments are directed sequentially.
The PAC tranche has significant protection against prepayment risk at the expense of the support or companion tranches.作者: cyber21 时间: 2012-4-2 18:17
Which of the following statements regarding CMOs is least accurate? The:
A)
early maturing tranches offer relatively greater protection against contraction risk.
B)
early maturing tranches offer relatively greater protection against extension risk.
C)
longer-term tranches offer relatively greater protection against contraction risk.
The early maturing tranches offer relatively greater protection against extension risk, not contraction risk.作者: cyber21 时间: 2012-4-2 18:17
Which of the following best describes how accrual bonds distribute prepayment risk among tranches to create products that provide better asset and liability matching for institutional investors? Accrual bonds:
A)
accrue the interest for one tranche and redistribute it to the other tranches.
B)
have a fixed principal repayment schedule that must be satisfied as long as the support tranches exist.
C)
have several different tranches to which accrued interest is directed sequentially.
For many sequential-pay CMO structures, the last tranche to be paid principal also does not receive current interest until the other tranches have been paid off. This tranche is called the Z-tranche or accrual tranche, and the securities that represent a claim against its cash flows are called Z-bonds or accrual bonds. The interest that would ordinarily be paid to the accrual tranche is applied against the outstanding principal of the other tranches, in sequence. The diverted interest from the accrual tranche accrues. That is, it is added to the outstanding principal balance of the Z-tranche.作者: cyber21 时间: 2012-4-2 18:18
Two structures of collateralized mortgage obligations (CMO) are being considered. In the first structure, $300 million of pass-throughs will be used as collateral for two sequential-pay tranches: $225 million of bonds of tranche U and $75 million of bonds of tranche V. The principal for tranche U must be completely paid off before any payments are made to tranche V. In the second structure, the $300 million of pass-throughs will be used as collateral for $225 million of X bonds in a planned amortization tranche and $75 million of Y bonds in a support tranche. Which of the following is least accurate? The:
A)
X bonds have less contraction risk than the Y bonds.
B)
U bonds have less contraction risk than the V bonds.
C)
U bonds have less extension risk than the V bonds.
The U bonds have less extension risk, but they provide protection for the V bonds against contraction.作者: cyber21 时间: 2012-4-2 18:18
Which of the following is most accurate for a companion tranche with a schedule of principal repayments? Such a companion tranche:
A)
has greater protection against prepayment risk than a support tranche without a schedule of principal payments.
B)
has no prepayment risk.
C)
provides less protection against prepayment risk than a support tranche without a schedule of principal payments.
PAC II tranches are companion tranches having PAC prepayment schedules. Like regular PAC tranches, these scheduled support tranches receive a degree of prepayment risk protection at the expense of increased prepayment risk to other support tranches.作者: cyber21 时间: 2012-4-2 18:19
Which of the following is referred to as a sequential-pay CMO? A sequential-pay CMO is structured so that each class of bond:
A)
receives prepayments on a sequential pro-rata basis.
B)
has different credit risk.
C)
is retired sequentially.
When there are prepayments, the principal in the first bond class (tranche) is reduced until it is fully retired, then the principal of the next bond class is retired, and so on.作者: cyber21 时间: 2012-4-2 18:19
$200 million of mortgage pass-throughs will be used as collateral for three tranches. The first two tranches are planned amortization class tranches: $110 million of bonds of tranche U and $50 million of bonds of tranche V. The third tranche consists of the holders of the $40 million of bonds in tranche W, which is a support tranche. Which of the following statements regarding the contraction risk and extension risk of the U bonds versus the V bonds is most accurate? The U bonds:
A)
have less contraction risk and less extension risk than the V bonds.
B)
have less extension risk but not less contraction risk than the V bonds.
C)
have less contraction risk but not less extension risk than the V bonds.
The planned amortization portion of the tranches allows for the lower support tranches to absorb the prepayments first with the upper tranches having the least amount of prepayment risk with tranche V having more prepayment risk than tranche U because U is more senior than V. Because U has the least amount of prepayment risk it also has the least amount of contraction risk once again because all the lower subordinate tranches and support tranches absorb the prepayments first.作者: cyber21 时间: 2012-4-2 18:20
Which of the following explains why the companion tranches have the greatest prepayment risk in a CMO structure? The companion tranches:
A)
are more interest rate sensitive and therefore prepayment risk is higher.
B)
have to support any principal payments in excess of the scheduled principal payments.
C)
consist of underlying mortgages for which prepayment is allowed, as opposed to the PAC tranches.
There is an inverse relationship between the prepayment risk of PAC tranches and the prepayment risk associated with the support tranches. In other words, the certainty of PAC bond cash flow comes at the expense of increased risk to the support tranches.作者: cyber21 时间: 2012-4-2 18:20
Which of the following is least accurate regarding planned amortization class (PAC) versus support tranches?
A)
The prepayment risk protection provided by the support tranches causes the average life to extend and contract.
B)
The PAC tranches have the greatest prepayment risk in the collateralized mortgage obligation (CMO) structure.
C)
There is an inverse relationship between the prepayment risk of the PAC tranches and the prepayment risk associated with the support tranches.
The support tranches have the greatest prepayment risk in the CMO structure, not the PAC tranches.作者: cyber21 时间: 2012-4-2 18:21
How is the price of a principal-only mortgage strip affected by declining mortgage rates in the market? The price of the principal-only strip:
A)
increases.
B)
decreases.
C)
is unaffected.
When mortgage rates decline, prepayments are expected to increase. Therefore, the principal-only strip investor gets payments sooner increasing the value of the PO.作者: cyber21 时间: 2012-4-2 18:21
Interest only (IO) strip cash flow:
A)
are the same throughout the life of the security.
B)
starts out big and gets smaller over time.
C)
starts out small and gets bigger over time.
IO strip cash flow starts out big and gets smaller over time.作者: cyber21 时间: 2012-4-2 18:21
Principal-only strips are:
A)
could be sold at a discount or a premium, depending on economic conditions.
B)
sold at par.
C)
sold at a considerable discount to par.
Principal-only strips are sold at a considerable discount to par.作者: cyber21 时间: 2012-4-2 18:22
Which of the following best describes a stripped mortgage-backed security (MBS)? A stripped MBS is a security:
A)
that provides no interest payments.
B)
whose distribution of principal and interest has been altered from a pro rata distribution to an unequal distribution.
C)
whose distribution of principal and interest has been altered from an unequal distribution to a pro rata distribution.
With a passthrough security, interest and principal payments generated by the underlying mortgage pool are allocated to the bondholders on a pro rata basis. This means that each passthrough certificate holder receives the same amount of interest and the same amount of principal. Stripped mortgage-backed securities differ in that principal and interest are not allocated on a pro rata basis.作者: cyber21 时间: 2012-4-2 18:22
Which of the following is most accurate regarding the investment characteristics of a principal-only (PO) mortgage strip?
A)
The faster the prepayments the higher the investor's return.
B)
The slower the prepayments the higher the investor's return.
C)
The lower the coupon the higher the investor's return.
For a principal mortgage strip the investor does not receive interest but only the principal. Therefore, the sooner the investor receives the principal the higher the return.作者: cyber21 时间: 2012-4-2 18:23
How is the price of an interest-only mortgage strip affected by declining mortgage rates in the market below the contract rate? The price of the interest-only strip:
A)
decreases.
B)
may increase or decrease.
C)
increases.
When mortgage rates decline, prepayments are expected to increase. This results in a deterioration of the expected cash flows from an interest-only strip.作者: cyber21 时间: 2012-4-2 18:23
Which of the following statements is least accurate concerning nonagency mortgage-backed securities (MBS)?
A)
They usually require credit enhancement.
B)
They are usually backed with “conforming” mortgage loans.
C)
They are issued by private entities.
Nonagency MBS are usually backed by “nonconforming” mortgages, such as those that do not meet the underwriting standards of the agencies.作者: cyber21 时间: 2012-4-2 18:24
All of the following statements regarding nonagency securities are correct EXCEPT:
A)
the collateral behind nonagency collateralized mortgage obligations is passthrough securities.
B)
the collateral behind nonagency CMOs is a pool of loans.
C)
loans used to back nonagency CMOs are referred to as nonconforming loans.
The collateral behind nonagency CMOs is a pool of loans, not passthrough securities.作者: cyber21 时间: 2012-4-2 18:24
Which of the following is a difference between agency and nonagency mortgage-backed securities (MBS)? Nonagency MBS:
A)
have floating mortgage rates.
B)
can only be for commercial real estate property.
C)
can be for any type of real estate property.
For agency MBS the underlying mortgages are one to four-single family residential mortgages only. Nonagency securities exist that are backed by second mortgage loans, manufactured housing loans, and a variety of commercial real estate loans, in addition to single family residential mortgages.作者: JustasS 时间: 2012-4-2 18:26
When assessing credit risk for a Commercial Mortgage-Backed Security (CMBS), the underwriter will complete which of the following financial analysis?
A)
Both of the answer choices are correct.
B)
Compute a weighted debt service coverage ratio (DSC ratio) for the overall portfolio.
C)
Compute the DSC ratio for each property in the CMBS.
Financial analysis of the DSC ratio for each property in the CMBS and analysis of the DSC ratio for the overall portfolio are both completed by the underwriter when assessing credit risk for a CMBS.作者: JustasS 时间: 2012-4-2 18:26
Which of the following is the primary difference between residential Mortgage-Backed Securities (MBS) and Commercial Mortgage-Backed Securities (CMBS) credit risk?
A)
Residential credit risk is difficult to quantify because of the nature of the residential borrower.
B)
In residential MBS securities, the lender has the ability to seek repayment from the borrower beyond the value of the collateral.
C)
Residential credit risk does not use financial ratio analysis for the determination of borrower credit worthiness.
All CMBS mortgages are non-recourse loans; however, the residential mortgage lender can go back to the borrower personally in an attempt to repay a delinquent mortgage loan.作者: JustasS 时间: 2012-4-2 18:26
When assessing credit risk for a commercial mortgage-backed security (CMBS), the underwriter will calculate which of the following ratios?
A)
Both the debt-to-service coverage ratio and the loan-to-value ratio.
B)
Loan-to-value ratio only.
C)
Debt-to-service coverage ratio only.
When assessing credit risk for a CMBS, the underwriter will complete both the debt-to-service coverage ratio and the loan-to-value ratio.作者: JustasS 时间: 2012-4-2 18:27
A distinguishing characteristic of a commercial mortgage-backed security (CMBS) as compared to residential mortgages is:
A)
Residential mortgages are non-recourse.
B)
Both CMBS and residential mortgages are non-recourse.
C)
CMBS are non-recourse.
CMBS are non-recourse. Residential mortgages are recourse, meaning that the lender can go back to the homeowner for payment if the collateral is insufficient.作者: JustasS 时间: 2012-4-2 18:27
Which of the following statements is most accurate concerning the effect of defeasance on the quality of a Commercial mortgage-backed securities (CMBS) loan pool? Defeasance:
A)
increases the quality of a CMBS loan pool by requiring fees for late payments.
B)
decreases the quality of a CMBS loan pool by selling some of the pool as payments come due.
C)
increases the quality of a CMBS loan pool by reinvesting any prepayments in Treasury securities.
Defeasance increases the quality of a CMBS loan pool by reinvesting any prepayments in Treasury securities.作者: JustasS 时间: 2012-4-2 18:28
Commercial Mortgage-Backed Securities (CMBS) provide structural call protection through which of the following key repayment terms?
A)
Sequential repayment of the CMBS tranches and the allocation of losses of principal to specific tranches, rather than to the CMBS overall.
B)
Losses of principal are allocated to specific tranches, rather than to the CMBS overall.
C)
Sequential repayment of the CMBS tranches.
CMBS securities provide structural call protection through sequential repayment of the CMBS tranches, as well as the allocation of losses of principal to specific tranches rather than to the overall CMBS.作者: JustasS 时间: 2012-4-2 18:28
Which of the following regarding key credit enhancement features of defeasance as prepayment protection is least accurate?
A)
No distributions are made when the defeasance takes place, so there is no issue concerning how prepayment penalties will be disbursed.
B)
The duration of the defeasance funds reduces the credit risk of the commercial mortgage-backed securities (CMBS).
C)
The cash flow from the defeasance funds is substituted for payments made by the borrower.
Duration is related to interest rate risk; it is not related to credit risk.作者: JustasS 时间: 2012-4-2 18:28
Commercial mortgage-backed securities (CMBS) provide call protection through loan-level and individual mortgage call protection. Which of the following are least likely forms of call protection?
A)
Borrowers are charged the amount of interest lost by the lender had the loan not been prepaid.
B)
Penalty fees assessed against the borrower for prepayment.
C)
If borrowers prepay their loan, proceeds are distributed to investors.
Loan-level call protection includes: defeasance, prepayment penalty charges, prepayment lock out period, and yield maintenance charges. Prepayment proceeds should not be distributed to investors. When borrowers prepay, the mortgage loan can be “defeased” – the loan proceeds are received by the loan servicer and invested in U.S. Treasuries to create cash collateral against the loan.作者: JustasS 时间: 2012-4-2 18:29
The strongest form of prepayment protection is:
A)
yield maintenance charges.
B)
defeasance.
C)
a one year prepayment lockout.
Defeasance occurs when prepayment loan proceeds received by the loan servicer are invested in U.S. Treasury securities. When the defeasance period ends, the U.S. Treasuries are liquidated and the proceeds are used to repay the mortgage. The collateral provided by the U.S. Treasuries is of higher quality than the underlying asset; therefore, defeasance represents the greatest level of prepayment protection for an investor.
