LOS f: Explain the factors that affect prepayments and the types of prepayment risks.

Q1. Which of the following mortgage loan characteristics least likely affects prepayments?

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

B)   original mortgage rate.

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

Q2. Which of the following most accurately describes prepayments?

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

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

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

Q3. Prepayments or curtailments:

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

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

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

Q4. Identify three risks associated with investing in mortgage-backed securities (MBS). Risks associated with investing in MBS are:

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

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

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

Q5. Which of the following factors does NOT affect prepayments?

A)   The time to maturity of the mortgage-backed security.

B)   Seasonal factors.

C)   Characteristics of the underlying mortgage pool.

Q6. Which of the following best describes how a growing economy can affect prepayments? A growing economy:

A)   does not affect prepayments.

B)   leads to increasing prepayments.

C)   leads to decreasing prepayments.

Q7. Which of the following best describes prepayment risk?

A)   The lender's interest rate risk resulting from prepayments.

B)   The risk associated with the unknown amount and timing of cash flow's resulting from prepayments.

C)   The lender's spread risk resulting from prepayments.

Q8. Payments in excess of the required monthly payment amount are called:

A)   mega-payments.

B)   passthroughs.

C)   prepayments.

Q9. 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.

[此贴子已经被作者于2009-3-23 17:02:41编辑过]

LOS f: Explain the factors that affect prepayments and the types of prepayment risks. fficeffice" />

Q1. Which of the following mortgage loan characteristics least likely affects prepayments?

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

B)   original mortgage rate.

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

Correct answer is A)

The reputation of the lender does not affect prepayments.

Q2. Which of the following most accurately describes prepayments?

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

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

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

Correct answer is A)

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.

Q3. Prepayments or curtailments:

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

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

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

Correct answer is B)

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

Q4. Identify three risks associated with investing in mortgage-backed securities (MBS). Risks associated with investing in MBS are:

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

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

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

Correct answer is A)

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.

Q5. Which of the following factors does NOT affect prepayments?

A)   The time to maturity of the mortgage-backed security.

B)   Seasonal factors.

C)   Characteristics of the underlying mortgage pool.

Correct answer is A)

The remaining life of the individual loans affect prepayments but not the life of the mortgage-backed security.

Q6. Which of the following best describes how a growing economy can affect prepayments? A growing economy:

A)   does not affect prepayments.

B)   leads to increasing prepayments.

C)   leads to decreasing prepayments.

Correct answer is B)

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.

Q7. Which of the following best describes prepayment risk?

A)   The lender's interest rate risk resulting from prepayments.

B)   The risk associated with the unknown amount and timing of cash flow's resulting from prepayments.

C)   The lender's spread risk resulting from prepayments.

Correct answer is B)

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.

Q8. Payments in excess of the required monthly payment amount are called:

A)   mega-payments.

B)   passthroughs.

C)   prepayments.

Correct answer is C)

Payments in excess of the required monthly payment amount are called prepayments.

Q9. 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.

Correct answer is A)        

The analyst must make specific assumptions about the rate at which prepayments of the pooled mortgages occur when valuing the passthrough securities.

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