cyber21

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.

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The support tranches have the greatest prepayment risk in the CMO structure, not the PAC tranches.

cyber21

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.

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When mortgage rates decline, prepayments are expected to increase. Therefore, the principal-only strip investor gets payments sooner increasing the value of the PO.

cyber21

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.

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IO strip cash flow starts out big and gets smaller over time.

cyber21

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.

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Principal-only strips are sold at a considerable discount to par.

cyber21

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.

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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.

cyber21

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.

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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.

cyber21

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.

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When mortgage rates decline, prepayments are expected to increase. This results in a deterioration of the expected cash flows from an interest-only strip.

cyber21

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.

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Nonagency MBS are usually backed by “nonconforming” mortgages, such as those that do not meet the underwriting standards of the agencies.

cyber21

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.

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The collateral behind nonagency CMOs is a pool of loans, not passthrough securities.

cyber21

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.

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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.