Question 1

Which of the following does NOT increase the noncredit risks of CDOs?

Accepted Answer

A)  Collateral management risk
B)  Certainty in average life of CDO tranches
C)  Higher correlation and liquidity
D)  None of the aboveE) C) and D)
F) B) and D)

Question 2

In comparison to mortgage pass-though securities,CMOs attract a broader class of investors because,by prioritizing cash flows,they can offer more specific maturities

Accepted Answer

A) True 
 B)False

Question 3

The total interest collected from the pool is ______ if prepayment accelerates;therefore,the dollar spread between interest inflow and outflow becomes ______

Accepted Answer

A)  Lower,smaller
B)  Lower,wider
C)  Higher,smaller
D)  Higher,widerE) A) and B)
F) B) and C)

Question 4

The credit rating of an MPTB depends largely on the:

Accepted Answer

A)  Amount of overcollateralization
B)  Degree to which government-related securities constitute the excess collateral
C)  Riskiness of the mortgage in the underlying pools
D)  All of the aboveE) A) and B)
F) A) and D)

Question 5

The residual position in the CMO offering is considered which kind of position?

Accepted Answer

A)  Primary
B)  Equity
C)  Interest
D)  DebtE) A) and B)
F) None of the above B

Question 6

A mortgage company is issuing a CMO with three tranches,with the principal and coupon rate given in the table above.What will be the weighted average coupon on the CMO when issued?

Accepted Answer

A)  9.25%
B)  10.00%
C)  10.08%
D)  11.00%E) B) and D)
F) A) and D)

Question 7

CDO managers raises capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments

Accepted Answer

A) True 
 B)False

Question 8

If a premium is paid on a CMO issue at the time of issue,yields will increase as prepayment rates accelerate

Accepted Answer

A) True 
 B)False  False

Question 9

In CMO terminology,planned amortization classes PACs are also known as companion tranches

Accepted Answer

A) True 
 B)False

Question 10

Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements regarding mortgage pass-through bonds MPTBs is FALSE?

Accepted Answer

A)  MPTBs can be viewed as mortgage-backed bonds with the pass-through of principal and prepayment features of a mortgage pass-through security
B)  Most MPTBs are based on residential mortgage pools and are generally overcollateralized
C)  MPTBs represent an undivided equity ownership interest in a mortgage pool
D)  All of the above are false.E) All of the above
F) None of the above

Question 12

What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?

Accepted Answer

A)  Default is the key risk with residential mortgages;prepayment is the key risk with commercial mortgages
B)  Interest rate risk is the key risk with residential mortgages;prepayment is the key risk with commercial mortgages
C)  Prepayment is the key risk with residential mortgages;default is the key risk with commercial mortgages
D)  Prepayment is the key risk with residential mortgages;interest rate risk is the key risk with commercial mortgages
E)  There are no significant distinctionsF) A) and E)
G) B) and E)

Question 13

A floater is a CMO tranche that has a variable interest rate

Accepted Answer

A) True 
 B)False

Question 14

For which of the following investments does the issuer bear prepayment risk?

Accepted Answer

A)  CMOs
B)  MBBs
C)  MPTs
D)  MPTBsE) C) and D)
F) All of the above

Question 15

REMICs were created in order to avoid taxes:

Accepted Answer

A)  Entirely
B)  At the investor level
C)  At the entity level
D)  No taxes can be avoided.E) B) and C)
F) None of the above

Question 16

Which of the following investments in NOT a debt obligation of the issuer?

Accepted Answer

A)  CMOs
B)  MBBs
C)  MPTs
D)  MPTBsE) A) and B)
F) All of the above

Question 17

Duration,as referred to in this chapter,is defined as:

Accepted Answer

A)  A measure of the extent to which different investments expose an investor to interest rate risk
B)  A measure of the weighted-average time required before all principal and interest is received on an investment
C)  A measure that takes into account both the size of cash flows and the timing of their receipt
D)  All of the aboveE) B) and D)
F) All of the above

Question 18

The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages

Accepted Answer

A) True 
 B)False

Question 19

Investors retain prepayment risk on MBBs,but issuers incur this risk with MPTs

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements regarding subprime mortgages is TRUE?

Accepted Answer

A)  Subprime mortgages are not Ginnie Mae guaranteed,so CMO investors are exposed to default risk
B)  Subprime mortgages are not Ginnie Mae guaranteed,so securities backed by subprime mortgages cannot be issued
C)  CMOs backed by subprime mortgages cannot be used as collateral for CDOs
D)  Because of diversification,securities backed by subprime loans and no more risky than those back by prime loansE) B) and C)
F) A) and D) A

Exam 20: The Secondary Mortgage Market: Cmos and Derivative Securities

Which of the following does NOT increase the noncredit risks of CDOs?

Correct AnswerverifiedShow Answer

In comparison to mortgage pass-though securities,CMOs attract a broader class of investors because,by prioritizing cash flows,they can offer more specific maturities

Correct AnswerverifiedShow Answer

The total interest collected from the pool is ______ if prepayment accelerates;therefore,the dollar spread between interest inflow and outflow becomes ______

Correct AnswerverifiedShow Answer

The credit rating of an MPTB depends largely on the:

Correct AnswerverifiedShow Answer

The residual position in the CMO offering is considered which kind of position?

Correct AnswerverifiedB

A mortgage company is issuing a CMO with three tranches,with the principal and coupon rate given in the table above.What will be the weighted average coupon on the CMO when issued?

Correct AnswerverifiedShow Answer

CDO managers raises capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments

Correct AnswerverifiedShow Answer

If a premium is paid on a CMO issue at the time of issue,yields will increase as prepayment rates accelerate

Correct AnswerverifiedFalse

In CMO terminology,planned amortization classes PACs are also known as companion tranches

Correct AnswerverifiedShow Answer

Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs

Correct AnswerverifiedShow Answer

Which of the following statements regarding mortgage pass-through bonds MPTBs is FALSE?

Correct AnswerverifiedShow Answer

What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?

Correct AnswerverifiedShow Answer

A floater is a CMO tranche that has a variable interest rate

Correct AnswerverifiedShow Answer

For which of the following investments does the issuer bear prepayment risk?

Correct AnswerverifiedShow Answer

REMICs were created in order to avoid taxes:

Correct AnswerverifiedShow Answer

Which of the following investments in NOT a debt obligation of the issuer?

Correct AnswerverifiedShow Answer

Duration,as referred to in this chapter,is defined as:

Correct AnswerverifiedShow Answer

The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages

Correct AnswerverifiedShow Answer

Investors retain prepayment risk on MBBs,but issuers incur this risk with MPTs

Correct AnswerverifiedShow Answer

Which of the following statements regarding subprime mortgages is TRUE?

Correct AnswerverifiedA

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The total interest collected from the pool is if prepayment accelerates;therefore,the dollar spread between interest inflow and outflow becomes

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B

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False

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A