manchester88

If a prepayment of principal is for an amount that is less than the full outstanding balance of the loan, it is know as a(n):

A) participation.

B) intermediate payment.

C) curtailment.

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If a prepayment of principal is for an amount that is less than the full outstanding balance of the loan, it is know as a curtailment.

manchester88

The risk that relates to the amount and timing of cash flows from a mortgage is known as:

A) liquidity risk.

B) prepayment risk.

C) default risk.

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Default risk is the risk that the borrower will not pay back the amounts borrowed. Liquidity risk deals with the ability to sell a security easily at a fair price.

manchester88

When a prepayment is less than the entire outstanding principal amount it is called:

A) prepayment risk.

B) securitized.

C) curtailment.

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Curtailment is when the prepayment is not for the entire amount. Prepayment risk is the risk that relates to the amount and timing of cash flows from a mortgage.

manchester88

A payment made that is in excess of the required monthly mortgage payment is called:

A) prepayment risk.

B) prepayment.

C) curtailment.

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This is the definition of prepayment. Curtailment is when the prepayment is not for the entire amount. Prepayment risk is the risk that relates to the amount and timing of cash flows from a mortgage.

manchester88

Which of the following statements least likely describes a mortgage passthrough security?

A) Participation certificates are sold, representing shares of a mortgage pool.

B) The security may be retired before maturity at face value with no penalty.

C) The payment structure redistributes the prepayment risk among various investors.

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A collateralized mortgage obligation (CMO), not a passthrough security, redistributes the prepayment risk among the investors through tranches. Because mortgage holders may prepay the mortgage, the passthrough may indeed be retired before maturity at face value with no penalty.

manchester88

The most popular form of credit enhancement is the senior-subordinated structure. What does the senior-subordinated collateral structure shown below indicate?

Senior tranche: $560 million

Subordinated tranche: $40 million

A) The subordinated tranche investor receives $40 million in repayment first. Then the cash flow goes to the senior tranche.

B) The first $40 million of losses are absorbed by the subordinated tranche.

C) The subordinated tranche is protected by the senior tranche.

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The loss of $40 million is applied to the subordinated tranche first and since it is large enough to absorb the entire loss, all $40 million is applied to the subordinated tranche.

manchester88

A debenture is:

A) a short-term debt.

B) an unsecured bond.

C) a bond secured by specific assets.

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A debenture by definition is unsecured debt.

manchester88

Which of the following institutions are federally-related institutions?

A) Government National Mortgage Association.

B) Student Loan Marketing Association.

C) Federal National Mortgage Association.

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Federally-related (or government-owned) agencies are arms of the federal government. Both of the other institutions listed are government-sponsored enterprises.

manchester88

Which of the following institutions is NOT a government-sponsored enterprise (GSE)?

A) Federal Farm Credit System.

B) Student Loan Marketing Association.

C) Government National Mortgage Association.

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Federally-related (or government-owned) agencies are arms of the federal government. Both of the other institutions listed are government-sponsored enterprises.

manchester88

A mortgage-backed security has the following characteristics:

• It was created by pooling a collection of more than a thousand mortgages

• Not all investors face the same prepayment risk

• Investors receive three distinct kinds of cash flows

• Freddie Mac issued the security

This security is a(n):

A) collateralized mortgage obligation.

B) agency debenture.

C) mortgage passthrough security.

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While most mortgage-backed securities pay three types of cash flows, only mortgage passthroughs and collateralized mortgage obligations (CMOs) are formed by pooling mortgages. Only CMOs divide investors into tranches with different cash flows and risk profiles. Debentures are securities not backed by collateral.