Reading 58: LOS e ～ Q1- 4 security, relevant, mortgage, following

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1.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.

D)   does not take the economic environment into account.

2.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.

D)   concept makes passthroughs attractive from an asset/liability perspective.

3.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)   scheduled principal payments.

B)   expected prepayments.

C)   both scheduled principal payments and expected prepayments.

D)   all interest payments.

4.The stated maturity of a mortgage passthrough security is:

A)   will usually equal its true life.

B)   unlikely to equal its true life.

C)   will always be longer than its true life.

D)   will always be shorter than its true life.

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1.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.

D)   does not take the economic environment into account.

The correct answer was B)

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.

2.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.

D)   concept makes passthroughs attractive from an asset/liability perspective.

The correct answer was 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.

3.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)   scheduled principal payments.

B)   expected prepayments.

C)   both scheduled principal payments and expected prepayments.

D)   all interest payments.

The correct answer was C)

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

4.The stated maturity of a mortgage passthrough security is:

A)   will usually equal its true life.

B)   unlikely to equal its true life.

C)   will always be longer than its true life.

D)   will always be shorter than its true life.

The correct answer was B)

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