Fixed Income Midterm 2
T/F Because of prepayments, the cash flow of a pass-through is always known with certainty.
F Because of prepayments, the cash flow of a pass-through is also not known with certainty.
T/F Within the Eurobond market, covenants are universalized and easy to implement given they are generally securities issued by governments.
F it is difficult for potential bond investors to agree on what form of covenants offer true protection given that eurobonds are geographically diverse.
Consider a $250,000, 25-year mortgage with monthly payments based on a 4.7% annual mortgage rate. The outstanding principal balance for this loan at the end of the 180th month is closest to?
First solve for payment N = 25 * 12 = 300 I/Y = 4.7 / 12 = .3917 PV = -250,000FV = 0 PMT = ? = 1,418.11 Then Solve for the present value of remaining payments N = 300 - 180 = 120 I/Y = Same FV = Same PMT = Same PV = ? = 135,568.96
Ralph Singh has applied for a mortgage loan that will require monthly payments of $980. Mr. Singh's gross monthly income is $3,200 and he has the expenses in the bullet listed below: Credit card debt payments = $670 per month Car payment = $450 per month Average utility payments = $300 per month. Entertainment expenses = 480 per month Expected homeowner insurance on new home = $1,200 per year Expected property taxes on new home = $4,800 per year Ralph's front and back ratios are closest to:
Front Ratio = (980 + 100 + 400) / 3,200 = 46.25% Back Ratio = (980 + 100 + 400 + 670 + 450) / 3,200 = 81.25%
Most transactions within the Eurobond market are governed by U.K. law, although New York state law is an occasional alternative.
T
T/F A CMO structure with no principal payments to a PAC bond class in the earlier years is referred to as a lockout structure. A lockout structure provides greater prepayment protection to all PAC bonds in the CMO structure.
T
T/F A global bond is one that is issued simultaneously in several bond markets throughout the world and can be issued in any currency. The three characteristics of a global bond are as follows: At issuance, they are sold simultaneously in multiple bond markets throughout the world at the same offering price. They are traded in multiple bond markets throughout the world without restrictions, with settlement that is similar to a trade of domestic bonds. The issuance size is large, allowing for multiple tranches by maturity.
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T/F Agency pass-through securities can be issued by the Governmental National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac).
T
T/F Although Eurobonds are typically registered on a national stock exchange (the most common being the Luxembourg, London, or Zurich exchanges), the bulk of all trading is in the over-the-counter market.
T
T/F Cross-default clauses state that if an issuer defaults on other borrowings, then the bonds will become due and payable.
T
T/F Euro Straights are plain vanilla fixed rate coupon bonds issued within the Eurobond market.
T
T/F Q: "What is the impact of a prepayment that is less than the amount required to completely pay off a loan?" A: The impact on the borrower is that the principal (or amount required to completely pay offa loan) is reduced by the amount paid off that period that goes beyond the interest due. The impact on the lender can involve risk and is captured by the concept of prepayment risk, which is the risk associated with a mortgage's cash flow due to prepayments. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall below the loan's note rate. For example, if the note rate on a mortgage originated five years ago is 8% and the prevailing mortgage rate (i.e., rate at which a new loan can be obtained) is 5.5%, then there is an incentive for the borrower to refinance the loan. The decision to refinance will depend on several factors, but the single most important one is the prevailing mortgage rate compared to the note rate. The disadvantage to the investor is that the proceeds received from the repayment of the loan must be reinvested at a lower interest rate than the note rate. This risk is the same as that faced by an investor in a callable corporate or municipal bond. However, unlike a callable bond, there is no premium that must be paid by the borrower in the case of a residential mortgage loan. Any principal repaid in advance of the scheduled due date is paid at par value. The exception, of course, is if the loan is a prepayment penalty mortgage loan.
T
T/F Q: In what sense has the investor in a residential mortgage loan granted the borrower (homeowner) a loan similar to a callable bond? A: Prepayment risk is the risk associated with a mortgage's cash flow due to prepayments. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall below the loan's note rate. For example, if the note rate on a mortgage originated five years ago is 8% and the prevailing mortgage rate (i.e., rate at which a new loan can be obtained) is 5.5%, then there is an incentive for the borrower to refinance the loan. The decision to refinance will depend on several factors, but the single most important one is the prevailing mortgage rate compared to the note rate. The disadvantage to the investor is that the proceeds received from the repayment of the loan must be reinvested at a lower interest rate than the note rate. This risk is the same as that faced by an investor in a callable corporate or municipal bond. However, unlike a callable bond, there is no premium that must be paid by the borrower in the case of a residential mortgage loan. Any principal repaid in advance of the scheduled due date is paid at par.
T
T/F Q: When a prepayment is made that is less than the full amount needed to completely pay off the loan, what happens to future monthly mortgage payments for a fixed-rate mortgage loan? A: This type of prepayment in which the entire mortgage balance is not paid off is called a partial payment or curtailment. When a curtailment is made, the loan is not recast. Instead, the borrower continues to make the same monthly mortgage payment. The effect of the prepayment is that more of the subsequent monthly mortgage payment is applied to the principal. The net effect of the prepayment is that the loan is paid off faster than the scheduled maturity date. That is, the maturity of the loan is "curtailed."
T
T/F The appeal of infrastructure debt to long-term investors seeking a capital market instrument is that it that has a longer maturity than the typically credit-sensitive debt currently available in the debt market.
T
T/F The cash flow of a pass-through security depends on the cash flow of the underlying loans.
T
T/F The pool factor is the percentage of the original principal that is still outstanding. At issuance, the pool factor is 1 and declines over time. Pool factor information is published monthly.
T
T/F The two primary factors in determining whether funds will be lent to an applicant for a residential mortgage loan are the payment-to-income ratio and loan-to-value ratio
T
Which of the following statement regarding adjustable-rate mortgages (ARMs) is NOT TRUE. a. The note rate on an adjustable rate mortgage changes over the life of the loan b. The initial rate of an ARM is typically higher than fixed rates c. ARMs have periodic rate caps that limit the amount that the interest rate may increase or decrease when it is adjusted d. all are not true
The initial rate of an ARM is typically higher than fixed rates. This is false. The initial rates are going to be lower than fixed rates
Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovakia, Spain, Sweden, Switzerland, the United Kingdom, and the United States would all be examples of? a. Developed Market Countries b. Emerging Market Countries c. Frontier Market Countries d. None of the Above
a. Developed Market Countries
What is a jumbo loan? a. For government loans and the loans guaranteed by Freddie Mac and Fannie Mae, there are limits on the loan balance, when those limits are exceed it is termed a "jumbo loan". b. The differences between a Freddie Mac loan and Fannie Mae loan. c. Maximum pool size allowed in a mortgage backed security. d. For government loans and the loans guaranteed by Freddie Mac and Fannie Mae, there are limits on the loan balance.
a. For government loans and the loans guaranteed by Freddie Mac and Fannie Mae, there are limits on the loan balance, when those limits are exceed it is termed a "jumbo loan".
_______ is a federally related institution that is part of the Department of Housing and Urban Development. The agency pass-throughs that it guarantees carry the full faith and credit of the U.S. government with respect to timely payment of both interest and principal. That is, the interest and principal are paid when due even if the underlying mortgagors fail to make their monthly mortgage payments. a. Ginnie Mae b. Freddie Mae c. Fannie Mac d. Office of Management and Budget
a. Ginnie Mae
The single most important determinant of the likelihood of default according to numerous studies is? a. Loan-to-Value Ratio b. Payment-to-Income Ratio c. Subprime Rating vs Prime Rating d. Being Backed by Gov or not
a. Loan-to-Value Ratio
What are the two categories of indexes used in adjustable-rate mortgages? a. Market-determined rates and calculated rates based on the cost of funds for thrifts. b. S&P 500 yearly growth rate and FED policy rate c. Market-determined rates and LIBOR. d. LIBOR and Treasury Rates
a. Market-determined rates and calculated rates based on the cost of funds for thrifts.
Ginnie Mae issues _________. a. Mortgage-Backed Securities (abbreviated MBS) b. Guaranteed Mortgage Pass-Through Certificates c. MBS Certificates d. Mortgage Participation Certificates (abbreviated PC)
a. Mortgage-Backed Securities (abbreviated MBS)
"How are FICO scores used in classifying loans?" a. The higher the FICO score is, the lower the credit risk. b. FICO scores range from 350 to 850, with 850 scores demonstrating the lowest credit quality loans. c. It is a mechanism to measure the credit quality of the loan recipient, if they have a FICO they automatically become ineligible for a loan. d. The lower the FICO score is, the lower the credit risk.
a. The higher the FICO score is, the lower the credit risk.
Explain why the higher the loan-to-value ratio is, the greater the credit risk is to which the lender is exposed. a. The higher this ratio is, the lower the protection for the lender if the applicant defaults on the payments and the lender must repossess and sell the property, because there's less equity incentive on the borrowers part. a. The higher this ratio is, the greater the protection for the lender if the applicant defaults on the payments and the lender must repossess and sell the property, because there's less equity incentive on the borrowers part. c. Both A and B d. None of the Options
a. The higher this ratio is, the lower the protection for the lender if the applicant defaults on the payments and the lender must repossess and sell the property, because there's less equity incentive on the borrowers part.
Loans that satisfy the underwriting standard of the agencies are typically used to create RMBS that are referred to as _________. a. agency mortgage backed securities b. nonagency MBS c. private label MBS d. subprime MBS
a. agency mortgage backed securities
Why is the cash flow of a residential mortgage loan unknown? a. credit risk, liquidity risk, price risk, and prepayment risk. b. default likelihood c. unknown re-sell value d. cash refinancing opportunities
a. credit risk, liquidity risk, price risk, and prepayment risk.
What is meant by strategic default behavior? a. increased propensity to voluntarily stop making their mortgage payments once the current LTV exceeds 125%, even if they can afford making monthly payments. b. increased propensity to voluntarily start making their mortgage payments, due to fear of losing equity in their property. c. defaulting due to not being able to make monthly mortgage payments. d. re-selling property in short time frame before house is expected to go into default.
a. increased propensity to voluntarily stop making their mortgage payments once the current LTV exceeds 125%, even if they can afford making monthly payments.
"What is an FHA-insured loan?" a. loan guarantees for borrowers who can afford only a low down payment and generally also have relatively low levels of income. b. loans made to eligible veterans and reservists, allowing them to receive favorable loan terms. c. loans issued by two government-sponsored enterprises, Freddie Mac and Fannie Mae. d. loans that have no explicit guarantee from the federal government.
a. loan guarantees for borrowers who can afford only a low down payment and generally also have relatively low levels of income.
With coupon step-up and coupon step-down bonds in the Eurobond market, a rating upgrade would result in a _____ coupon rate. a. lower b. higher c. non-changing d. adjustable
a. lower
Servicing of the mortgage involves collecting ______ payments from mortgagors and forwarding proceeds to owners of the loan. a. monthly b. yearly c. quarterly d. semi-annual
a. monthly
There is no clear definition of what an "infrastructure asset" is, but most arise from a form of financing known as ____________. a. project financing b. commercial lease agreements c. tangible notes d. commercial mortgages
a. project financing
Investors who would be most interested in investing in accrual bonds are those who are concerned with? a. reinvestment risk b. exchange-rate risk c. duration risk d. credit risk
a. reinvestment risk
To estimate monthly prepayments, the CPR must be converted into a monthly prepayment rate, commonly referred to as? a. the single-monthly mortality rate (SMM) b. weighted-prepayment-conditionality rate (WPC) c. weighted-average maturity (WAM) d. weighted-average coupon rate (WAC)
a. the single-monthly mortality rate (SMM)
Rule 144a allows __________. a. the trading of privately placed securities among qualified institutional buyers. b. the trading of publicly placed securities among qualified institutional buyers. c. the trading of privately placed securities among qualified individual buyers. d. the trading of publicly placed securities among qualified individual buyers
a. the trading of privately placed securities among qualified institutional buyers.
Suppose that a savings and loan association has decided to invest in mortgage-backed securities and is considering the following two securities: (i) a Freddie Mac pass-through security with a WAM of 340 months or (ii) a PAC tranche of a Freddie Mac CMO issue with an average life of two years. Which mortgage-backed security would probably be better from an asset/liability perspective? a. (i) b. (ii) c. (i) and (ii) have same prospects d. neither
b. (ii)
Typically a servicing fee on a mortgage ranges from ________ basis points per year to _______ basis points per year. a. 50 - 150 b. 25 - 100 c. 75 - 100 d. 50 - 125
b. 25 - 100
For example, if an applicant wants to borrow $225,000 on property with an appraised value of $300,000, the LTV is ______ a. 60% b. 75% c. 83% d. 71%
b. 75%
"What is the difference between a prime loan and a subprime loan?" a. A subprime loan is a loan that is originated for which the borrower is viewed to have a high credit quality while a prime loan is a loan that is originated for which the borrow is of lower credit quality or the loan is not a first lien on the property. b. A prime loan is a loan that is originated for which the borrower is viewed to have a high credit quality while a subprime loan is a loan that is originated for which the borrow is of lower credit quality or the loan is not a first lien on the property. c. Subprime loans are loans that are issued to mortgages in the "southern" part of the united states, giving them the "sub" name due to being south. d. They are the same security with interchangeable terminology.
b. A prime loan is a loan that is originated for which the borrower is viewed to have a high credit quality while a subprime loan is a loan that is originated for which the borrow is of lower credit quality or the loan is not a first lien on the property.
Explain the step-up and step-down structure used in the Eurobond market. a. A step-up or step-down in the Eurobond market is based on a change in the prepayment speed of the underlying security. b. A step-up or step-down in the Eurobond market is based on a change in the rating of the credit quality of the underlying security. c. A step-up or step-down in the Eurobond market is a debt instrument which transfers payment to another national government over a specified time period. d. This security structure provides a guarantee from national governments that in the event of potential default, tax revenue will "step-up" or "step-down" to meet the payment obligations.
b. A step-up or step-down in the Eurobond market is based on a change in the rating of the credit quality of the underlying security
Among these financial organizations, which the most likely to be an originator of residential mortgage loans? a. Hedge Funds b. Commercial Banks c. Pension Funds d. Credit Risk Management Departments in an Investment Bank
b. Commercial Banks
What is the Pfandbriefe market? a. Bonds issued within the Eurobond market that are essentially a synthetic active currency play in the Euro. b. Covered bonds issued by German mortgage banks that is collateralized by long-term assets. c. A barter market within the eurodollar market d. The segmentation of the Eurobond market that deals with security issues for supranational agencies looking to raise money for commodity and agricultural investments.
b. Covered bonds issued by German mortgage banks that is collateralized by long-term assets.
_________ market countries include Brazil, Russia, India, and China (as a group, popularly referred to as BRIC); Portugal, Ireland, Italy, Greece, Spain (collectively referred to as PIIGS); and other countries. China and India are the two largest _________ market countries." a. Developed Market Countries b. Emerging Market Countries c. Frontier Market Countries d. None of the Above
b. Emerging Market Countries
A borrower with which of the following loan balances is most likely to default on their mortgage? a. Equity = 50% and Loan Balance = 50% b. Equity = 49% and Loan Balance = 51% c. Equity = 51% and Loan Balance = 49% d. Equity = Equity 52% and Loan Balance = 48%
b. Equity = 49% and Loan Balance = 51%
Their mission is to support the liquidity and stability of the mortgage market. They accomplish this by (1) buying and selling mortgages, (2) creating pass-throughs and guaranteeing them, and (3) buying RMBS. The agency pass-throughs they issue are not guaranteed by the full faith and credit of the U.S. government. Rather, the payments are secured first by the cash flow from the underlying pool of loans and then by a corporate guarantee. This is an example of which agencies? a. Ginnie Mae and Freddie Mae b. Freddie Mae and Fannie Mac c. Ginnie Mae and Fannie Mac d. Ginnie Mae, Freddie Mae, Fannie Mac
b. Freddie Mae and Fannie Mac
Although it is often stated that Ginnie Mae issues mortgage-backed securities, why is that technically incorrect? a. Because Freddie Mae is technically the issuer of MBS b. Ginnie Mae provides the guarantee, but it is not the issuer. c. The government is not allowed to issue mortgages therefore it is incorrect d. Because Fannie Mac is technically the issuer of MBS
b. Ginnie Mae provides the guarantee, but it is not the issuer.
Freddie Mae issues _________. a. Mortgage-Backed Securities (abbreviated MBS) b. Guaranteed Mortgage Pass-Through Certificates or MBS Certificates c. Agency Participation Agreements (abbreviated ABA) d. Mortgage Participation Certificates (abbreviated PC)
b. Guaranteed Mortgage Pass-Through Certificates or MBS Certificates
What is the advantage of a prepayment penalty mortgage from the perspective of the lender? a. There is no advantage for the lender b. The lender can reduce losses if the borrower chooses to pay off the mortgage when rates fall. c. The prepayment penalty reduces the likelihood of default on the mortgage. d. Both B and C
b. The lender can reduce losses if the borrower chooses to pay off the mortgage when rates fall.
The "maturity date" for this mortgage pass through security is shown as "10/01/2035." An investor in this security might be concerned about its very long maturity (30 years). Why is the maturity date a misleading measure of the security's maturity? a. The pool has variable maturities within it, making the true maturity random. b. The maturity is misleading because of prepayments that, in essence, make the maturity less. c. The maturity date is misleading because the security is callable, meaning it can be called on specified dates beforehand. d. Both a and c
b. The maturity is misleading because of prepayments that, in essence, make the maturity less.
For mortgage loans, what is prepayment risk? a. The risk associated with a mortgage's cash flow due to credit quality. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates rise above the loan's note rate. b. The risk associated with a mortgage's cash flow due to prepayments. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall below the loan's note rate. c. The risk associated with a mortgage's cash flow due to default. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall below the loan's note rate. d. Both A and C
b. The risk associated with a mortgage's cash flow due to prepayments. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall below the loan's note rate.
"What is an alternative-A loan?" a. Loans in the same vain as prime loans, with a shorter maturity structure b. These loans had been considered to be prime loans (the "A" refers to the A grade assigned by underwriting systems), but they have some attributes that either increase their perceived credit riskiness or cause them to be difficult to categorize and evaluate due to limited income or asset documentation. c. Auto loans issued by mortgage companies that are backed by Fannie and Freddie. d. Loans in the same vain as sub-prime loans, with a shorter maturity structure
b. These loans had been considered to be prime loans (the "A" refers to the A grade assigned by underwriting systems), but they have some attributes that either increase their perceived credit riskiness or cause them to be difficult to categorize and evaluate due to limited income or asset documentation.
Foreign bonds in the _____ are referred to as bulldog bonds, in the _____ as Rembrandt bonds, and in _____ as matador bonds. a. Netherlands, Jamaica, Portugal b. United Kingdom, Netherlands, Spain c. United Kingdom, Belgium, Portugal d. Scotland, Switzerland, Italy
b. United Kingdom, Netherlands, Spain
Bonds traded in the U.S. foreign bond market are nicknamed ______ bonds. a. Poor-Man's b. Yankee c. Hamilton d. EuroAmericana
b. Yankee
According to Modern Portfolio Theory, investors should realize a _________ expected return for a given level of risk by adding non-dollar bonds into a portfolio containing U.S. bonds a. lower b. higher c. flat d. optimal
b. higher
The _______ the PTI, the ________ the likelihood that the applicant will be able to meet the required monthly mortgage payments. a. greater; lower b. lower; greater c. lower; lower d. greater; greater
b. lower; greater
a type of MBS created by pooling mortgage loans and issuing certificates entitling the investor to receive a pro rata share in the cash flows of the specific pool of mortgage loans that serves as the collateral for the security a. agency mbs b. mortgage pass-through security c. residential mortgage loan d. syndicated mortgage offering
b. mortgage pass-through security
Therefore, the coupon rate on a pass-through security, called the __________, is less than the mortgage rate on the loan pool by an amount equal to the servicing and guaranteeing fees. a. yield-to-maturity b. pass through coupon rate c. issued rate d. prepayment rate
b. pass through coupon rate
To value a pass-through security, it is necessary to project its cash flow. The difficulty is that the cash flow is unknown because of ________. To remedy this, investors project the __________ of the mortgage. a. credit risk; liquidity b. prepayment; prepayment speed c. monthly incomes; yields d. refinancing; interest rates
b. prepayment; prepayment speed
What type of property is security for a residential mortgage loan? a. intellectual property b. real estate c. intangible assets d. tangible assets
b. real estate
A person with a monthly income of $5,000 and and mortgage payment of $1,250 has a payment-to-income ratio of? a. 0.50 b. 4 c. 0.25 d. $1,250
c. 0.25
In order for a loan to be classified as "prime," the front and back ratios should be no more than ______ and ______, respectively. a. 10%; 35% b. 18%; 52% c. 28%; 36% d. 35%; 45%
c. 28%; 36%
After origination of a mortgage-backed security, the WAM changes. What measures are used by Fannie Mae and Freddie Mac to describe the term to maturity of the loans remaining in the loan pool? a. Both A and B b. After origination of the MBS, the WAM of a pool does not change. Fannie Mae and Freddie Mac report the remaining number of months to maturity for a loan pool, which they refer to as weighted average remaining maturity (WARM). c. After origination of the MBS, the WAM of a pool changes. Fannie Mae and Freddie Mac report the remaining number of months to maturity for a loan pool, which they refer to as weighted average remaining maturity (WARM). Both Fannie Mae and Freddie Mac also report the weighted average of the number of months since the origination of the security for the loans in the pool. This measure is called the weighted average loan age (WALA). d. None of the above
c. After origination of the MBS, the WAM of a pool changes. Fannie Mae and Freddie Mac report the remaining number of months to maturity for a loan pool, which they refer to as weighted average remaining maturity (WARM). Both Fannie Mae and Freddie Mac also report the weighted average of the number of months since the origination of the security for the loans in the pool. This measure is called the weighted average loan age (WALA).
There are issues that pay coupon interest in one currency but pay the principal in a different currency, these are _________. a. Adjustable Rate Bond b. Collared Bond c. Dual-Currency Issues d. Drop-lock bonds
c. Dual-Currency Issues
_______ market issuers rely on international investors for capital. _______ markets cannot finance their fiscal deficits domestically because domestic capital markets are poorly developed and local investors are unable or unwilling to lend to the government. a. Frontier b. Developed c. Emerging d. Mid-Frontier
c. Emerging
Argentina, Bahrain, Bangladesh, Benin, Burkina Faso, Croatia, Estonia, Guinea-Bissau, Ivory Coast, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Mali, Mauritius, Morocco, Niger, Nigeria, Oman, Romania, Senegal, Serbia, Slovenia, Sri Lanka, Togo, Tunisia, and Vietnam would all be examples of? a. Developed Market Countries b. Emerging Market Countries c. Frontier Market Countries d. None of the Above
c. Frontier Market Countries
_________ characterizes a country whose economy is slower than those of developing market countries. One characteristic of ________ markets is a lack of transparency and information. As a result, there is considerable difference about whether securities are properly priced in the market, a key consideration for asset managers who are required to frequently mark-to-market their positions." a. Developed Market Countries b. Emerging Market Countries c. Frontier Market Countries d. None of the Above
c. Frontier Market Countries
How does sequential pay structure impact the average life of lower priority tranches? a. It increases the average life because they are the first to receive their full distribution b. It decreases the average life because they are the last to receive their full distribution c. It increases the average life because they are the last to receive their full distribution d. b. It decreases the average life because they are the first to receive their full distribution
c. It increases the average life because they are the last to receive their full distribution
Suppose a $2 billion mortgage pass-through is used to create a collateralized mortgage obligation (CMO) with a planned amortization class (PAC) bond with a par value equal to $150 million and a support bond with a par value of $800 million. Which of the financial instruments will have the lowest average life variability? a. The CMO b. Tranche B in the CMO c. PAC Bond d. Tranche A in the CMO
c. PAC Bond
Yen-denominated bonds issued by non-Japanese entities are nicknamed ______. a. Yankee Bonds b. Yen-Yen Bonds c. Samurai Bonds d. Hikaru Bonds
c. Samurai Bonds
If a non-central government, government entity wanted to issue a foreign bond, it would be classified as? a. Eurodollar bond b. Sovereign bond c. Subnational government bond d. Supranational Agency
c. Subnational government bond
What does the "pass-through rate" of 5% mean? a. The yield to maturity is 5% b. The coupon rate minus fees is 4.5% c. The coupon rate is 5% d. The fees are 5%
c. The coupon rate is 5%
Which has the greatest average life variability in a CMO structure? a. The PAC bond class b. The collateral c. The support bond class d. The Z bond class
c. The support bond class
What are the front ratio and back ratio, and how do they differ? a. These ratios compare the payments expected on a mortgage at the beginning of a mortgage and the back half of a mortgage. b. These ratios compare the monthly payment that the applicant would have to pay if the loan is granted to the applicant's monthly income, they differ by the front ratio takes into account other monthly debt payments such as auto loans while the back ratio does not. c. These ratios compare the monthly payment that the applicant would have to pay if the loan is granted to the applicant's monthly income, they differ by the back ratio takes into account other monthly debt payments such as auto loans while the front ratio does not. d. There is no difference between the two ratios, both measure the credit quality of the borrower.
c. These ratios compare the monthly payment that the applicant would have to pay if the loan is granted to the applicant's monthly income, they differ by the back ratio takes into account other monthly debt payments such as auto loans while the front ratio does not.
Explain why in a fixed-rate mortgage, the amount of the mortgage payment applied to interest declines over time, while the amount applied to the repayment of principal increases. a. Both B and C b. With each monthly payment, an excess above the interest owed is paid. This extra serves to increase the outstanding principal (or balance owed). With an increased balance owed, the next monthly mortgage payment will consist of a lower amount of interest paid since the interest rate is multiplied times a lower balance. Since the payment is fixed, this means that more of the fixed payment can be applied to lower the principal. Hence, the monthly interest declines over time, while an increasing amount is applied to the repayment of the principal. c. With each monthly payment, an excess above the interest owed is paid. This extra serves to reduce the outstanding principal (or balance owed). With a reduced balance owed, the next monthly mortgage payment will consist of a lower amount of interest paid since the interest rate is multiplied times a lower balance. Since the payment is fixed, this means that more of the fixed payment can be applied to lower the principal. Hence, the monthly interest declines over time, while an increasing amount is applied to the repayment of the principal. d. None of the options
c. With each monthly payment, an excess above the interest owed is paid. This extra serves to reduce the outstanding principal (or balance owed). With a reduced balance owed, the next monthly mortgage payment will consist of a lower amount of interest paid since the interest rate is multiplied times a lower balance. Since the payment is fixed, this means that more of the fixed payment can be applied to lower the principal. Hence, the monthly interest declines over time, while an increasing amount is applied to the repayment of the principal.
Coupon payments are made _______, rather than ________, because of the higher cost of distributing interest to geographically dispersed bondholders. a. monthly; semi-annually b. quarterly; monthly c. annually; semi-annually d. semi-annually; monthly
c. annually; semi-annually
Fannie Mae and Freddie Mac can buy any types of loans but only _______________ loans for securitization purposes. a. private b. prime c. conventional d. subprime
c. conventional
What was the motivation for the creation of PAC bonds? a. add extra leverage to pools b. distribute risk evenly across tranches c. diminish the uncertainty in cash flows including prepayment risk. d. create a callable bond within the CMO structure
c. diminish the uncertainty in cash flows including prepayment risk.
Three components of return for a non-dollar denominated bond portfolio include: a. foreign cash flows, foreign debt servicing, tax revenue b. default premiums, tax revenue, foreign currency gain/loss c. income, capital gain/loss in the local currency, foreign currency gain/loss. d. tax shield returns, fiscal revenues, capital gain/loss in the foreign currency
c. income, capital gain/loss in the local currency, foreign currency gain/loss.
What is the original LTV of a mortgage loan? a. the ratio of the current monthly payments divided by the current monthly income. b. the ratio of the original monthly payments divided by the original monthly income. c. the ratio of the original loan balance divided by the estimated market value. d. the ratio of the current loan balance divided by the estimated market value.
c. the ratio of the original loan balance divided by the estimated market value.
A _________ is found by weighting the remaining number of months to maturity for each mortgage loan in the pool by the amount of the mortgage outstanding at issuance. a. payments-to-income ratio b. loan-to-value ratio c. weighted-average maturity (WAM) d. weighted-average coupon rate (WAC)
c. weighted-average maturity (WAM)
Prime (or A-grade) loans generally have FICO scores of ______ or higher and LTV's less than _____. a. 800; 75% b. 500; 60% c. 620; 90% d. 660; 50%
d. 660; 90%
Automatically changing the floating coupon rate into a fixed coupon rate under certain circumstances is an example of which type of Eurobond? a. Adjustable Rate Bond b. Collared Bond c. Z Bond d. Drop-lock bonds
d. Drop-lock bonds
What is meant by conforming limits? a. Measures the lenders have to meet in order to be able to originate private mortgages. b. The differences between a Freddie Mac loan and Fannie Mae loan. c. Maximum pool size allowed in a mortgage backed security. d. For government loans and the loans guaranteed by Freddie Mac and Fannie Mae, there are limits on the loan balance.
d. For government loans and the loans guaranteed by Freddie Mac and Fannie Mae, there are limits on the loan balance.
Suppose that for the first four years of a CMO, prepayments are well within the initial PAC collar. What will happen to the effective upper collar? a. The CMO structure will change dependent on the convenant agreement. b. If the prepayments are well within the initial PAC collar, this means that there are more bodyguards (i.e., support bonds) around than was expected when the PAC was structured at the initial collar. This will result in a decrease in the upper range of the effective collar. c. The collar will be removed because they are no longer needed. d. If the prepayments are well within the initial PAC collar, this means that there are more bodyguards (i.e., support bonds) around than was expected when the PAC was structured at the initial collar. This will result in an increase in the upper range of the effective collar.
d. If the prepayments are well within the initial PAC collar, this means that there are more bodyguards (i.e., support bonds) around than was expected when the PAC was structured at the initial collar. This will result in an increase in the upper range of the effective collar.
Fannie Mac issues _________. a. Mortgage-Backed Securities (abbreviated MBS) b. Guaranteed Mortgage Pass-Through Certificates c. MBS Certificates d. Mortgage Participation Certificates (abbreviated PC)
d. Mortgage Participation Certificates (abbreviated PC)
What is the problem with using the original LTV to assess the likelihood that a seasoned mortgage will default? a. The ratio is does not account for new changes in monthly income. b. The ratio is no longer taking account rental income therefore it cannot be used accurately. c. The ratio is still accurate to use. d. The ratio is no longer accurate because the estimated market value and remaining loan balance of the house may have changed.
d. The ratio is no longer accurate because the estimated market value and remaining loan balance of the house may have changed.
Explain the role of a support bond in a CMO structure. a. To support other tranches by taking on all of the re-financed mortgages within the pool, therefore eliminating credit risk for other tranches in the pool. b. The support bond class in a CMO structure provides for the credit risk protection for the other bond classes. c. Both b and d d. The support bond class in a CMO structure provides for the prepayment protection for the other bond classes. It is the support bonds that forego principal payments if the collateral prepayments are slow. Support bonds do not receive any principal until the PAC bonds receive the scheduled principal repayment.
d. The support bond class in a CMO structure provides for the prepayment protection for the other bond classes. It is the support bonds that forego principal payments if the collateral prepayments are slow. Support bonds do not receive any principal until the PAC bonds receive the scheduled principal repayment.
What does a negative pledge in the Eurobond market do? a. They provide the documentation for using margin to obtain debt within the market b. They provide debt holders with the governments guarantee that they are not responsible for payments in the event of default c. They act as an inverse to covenant agreements. d. They prohibit an issuer from creating security interests on its assets unless all bondholders receive the same level of security.
d. They prohibit an issuer from creating security interests on its assets unless all bondholders receive the same level of security.
What is one way to engage in an "active currency play?" a. buy stocks in foreign countries b. short the euro-dollar market c. arbitrage tech stock mispricings d. buy foreign denominated bonds without hedging the currency component
d. buy foreign denominated bonds without hedging the currency component
An issue that has both a floor and a cap is said to be ________. a. capped b. floored c. fixed d. collared
d. collared
Who has first claim on a forced liquidation of the property due to default by the obligor? a. homeowner b. second lien c. junior lien d. first lien
d. first lien
Homeowners with _____ amounts of ______ in their properties are unlikely to default. a. small; equity b. large; debt c. small; collateral d. large; equity
d. large; equity
What is a conventional loan? a. loan guarantees for borrowers who can afford only a low down payment and generally also have relatively low levels of income. b. loans made to eligible veterans and reservists, allowing them to receive favorable loan terms. c. loans issued by two government-sponsored enterprises, Freddie Mac and Fannie Mae. d. loans that have no explicit guarantee from the federal government.
d. loans that have no explicit guarantee from the federal government.
A loan that is originated with a borrower who has less than investment grade credit and the or the loan is not a first lien on the mortgaged property is classified as a: a. prime b. conforming c. non-conforming d. subprime
d. subprime
The 3 classified markets are developed, emerging, frontier. Two attributes differentiate these three capital markets. They are _________ and _________. a. political stability; economic stability b. gdp in real terms; the liberalization of economic markets compared to 10 years ago c. the geopolitical stability; defense spending d. the development of a country's economy; the development of its capital markets
d. the development of a country's economy; the development of its capital markets
What is the current LTV of a mortgage loan? a. the ratio of the current monthly payments divided by the current monthly income. b. the ratio of the original monthly payments divided by the original monthly income. c. the ratio of the original loan balance divided by the estimated market value. d. the ratio of the current loan balance divided by the estimated market value.
d. the ratio of the current loan balance divided by the estimated market value.
A ___________ is found by weighting the note rate of each mortgage loan in the pool by the amount of the mortgage outstanding at issuance. a. payments-to-income ratio b. loan-to-value ratio c. weighted-average maturity (WAM) d. weighted-average coupon rate (WAC)
d. weighted-average coupon rate (WAC)
