Fixed Income【Reading 51】Sample 2012, mortgage, following, statements

ShooterMcCFA

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.

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Interest payments fall as principal payments rise over the life of the loan, not the other way around.

ShooterMcCFA

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.

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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).

ShooterMcCFA

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.

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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.

ShooterMcCFA

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.

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A mortgage is a loan that is collateralized with a specific piece of real property, either residential or commercial.

ShooterMcCFA

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.

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Curtailments are prepayments of mortgages for less than the full amount.

ShooterMcCFA

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.

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Mortgage insurance is often required, depending on the creditworthiness of the borrower or the amount of equity in the loan.

ShooterMcCFA

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.

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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.

ShooterMcCFA

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.

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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.

ShooterMcCFA

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.

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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.

ShooterMcCFA

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.

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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.