Chapter 9: FIL 241

d

A conventional fixed-rate 7% mortgage with the original maturity of 15 years and initial balance of $200,000 will be paid off in ___ months if the borrower pays $100 in addition to the required payment each month. A. 180 B. 175 C. 171 D. 164 E. 156

b

Amortization of a mortgage is the ______. A. practice of charging interest on a loan B. process of gradually retiring a loan by periodic principal payments C. compounding of interest D. use of debt to enhance the rate of return E. process of making daily payments to the borrower

c

An adjustable-rate mortgage has a 5/1 cap (i.e., the rate cannot increase more than 1 percent per year and more than 5 percent over the life of the mortgage). What will the mortgage rate be after three years if the initial rate is 5%, and the interest rate to which the mortgage rate is tied increases by 2% in each of the first three years of the contract? A. 11% B. 7% C. 8% D. 9% E. 10%

a

If interest rates unexpectedly decrease, cash flows to interest-only mortgage-backed strips would likely be _____ and cash flows to principal-only strips would likely be _____ anticipated before the interest rate change. (Assume underlying mortgages are fixed-rate. Assume no default risk.) A. lower than; higher than B. higher than; lower than C. lower than; lower than D. higher than; higher than E. about the same as; about the same as

c

Which of the following is NOT a characteristic of individual mortgages or markets for individual mortgages? A. Secured by real property B. Numerous small issuers C. Multiple lenders per issue D. No standardization in terms E. All of the above are characteristics of individual mortgages or markets for individual mortgages.

d

Which of the following is NOT a characteristic of mortgage-backed securities (MBS)? A. They are backed by quality borrowers. B. They are usually insured and highly collateralized. C. They are issued in standardized denominations. D. They are less marketable than individual mortgages. E. All of the above are characteristics of MBS.

b

Which of the following is NOT associated with tightening (i.e., stricter) mortgage credit standards? A. More time on the current job required B. An increase in the required loan-to-value ratio C. A decrease in the maximum total debt payments per month per amount of monthly income D. A decrease in the payment-to-income ratio of borrowers E. both (C) and (D)

Interest only strips

receive cash flows from interest payments on a mortgage pool

Principal only strips

receive cash flows from principal payments in a mortgage pool

b

A mortgage-backed instrument consisting of different classes of related debt obligations, called tranches, and passing through principal and interest payments to investors according to a predetermined schedule is known as _______. A. a pass-through B. a collateralized mortgage obligation (CMO) C. a stripped mortgage-backed security D. none of the above

a

As interest rates rise, the value of principal-only (PO) mortgage-backed strips _______ and the value of interest-only (IO) strips _______. (Assume the underlying mortgages are fixed-rate. Assume no default risk.) A. decreases; increases B. increases; decreases C. does not change; does not change D. decreases; decreases E. increases; increases

e

Cash flows of which mortgage-backed securities are affected by mortgage prepayments? A. Pass-throughs B. Principal-only strips C. Interest-only strips D. CMOs E. All of the above

Standardized denominations, quality, insured, collateralized, bonds, advantage

Characteristics of MBS 1. Issued in ____________________ 2. Issued or backed by __________ borrowers 3. Usually __________ and highly ___________ 4. Repayment schedules vary but many are similar to _________ These give MBS _____________ over individual mortgages.

Adjustable Rate Mortgages

Reduces interest rate risk to lender, may increase default risk Starts at a "teaser" rate below market Lower rates than the other option Must be capped by law

collateralized mortgage obligations

Types of MBS Pass-through is sliced into several classes (trances) with sequential maturities Investors choose class that matches their maturity preference Timing of cash flows depends on prepayments

Stripped MBS

Types of MBS Two types: Interest only and Principal only must include both IO's and PO's

Pass-throughs

Types of MBS avoid principal and interest payments on pools of mortgages (less insurance, fees, etc.) to investors

Fixed Rate Mortgages

Usually 15 or 30 years. Payments amortized over time

a

What is most likely to happen to an adjustable-rate mortgage in an increasing interest rate environment? A. The borrower's required payments will increase. B. The borrower's required payments will decrease. C. The mortgage borrower will be less likely to default. D. The maturity of the loan will be extended. E. The principal of the loan will increase.

real, small, one, standardization, secondary, regulation

What makes mortgage markets unique? 1. Secured by __________ property 2. Numerous _________ issuers 3. _______ lender per issue 4. no ____________ in terms 5. Weak __________ market for whole mortgages 6. High level of _________

prepayment risk

When interest rate decreases, mortgages increase in value at a decreasing rate as payments increase vice versa. Duration is not a good measure of interest rate risk- uncertain cash flows

e

Which of the following is true about adjustable-rate mortgages (ARMs)? A. The ARM's rate can be adjusted periodically. B. ARMs reduce interest rate risk to the lender. C. ARMs reduce default risk to the lender. D. ARMs are required by law to initially have a rate below the market rate for fixed-rate mortgages of the same maturity. E. Both (A) and (B) are true.

d

Which of the following statements about FHA and VA mortgages is NOT true? A. They are insured by the government. B. FHA and VA charge for their insurance. C. They have low down payments. D. The borrower is protected in case of default. E. All of the above are true.

d

Which of the following statements about fixed-rate mortgages is wrong? A. A 15-year fixed-rate mortgage has higher required principal payments (the principal portions of the required monthly payments) than a 30-year FRM if the rate and the initial balance are the same. B. The required monthly payment on a typical fixed-rate mortgage consists of the principal and interest components. C. The required payment of a fixed-rate mortgage is constant. D. Observing the amortization schedule of a fixed-rate mortgage, the principal portion of the required payment is decreasing over time while the interest portion is increasing. E. None of the above statements is wrong (i.e., all of the above statements are correct).

b

Which of the following statements about mortgage rate caps is true? A. Most fixed-rate mortgages have interest rate caps. B. Most adjustable-rate mortgages have interest rate caps. C. An interest rate cap on a mortgage reduces the lender's interest rate risk exposure. D. both (A) and (C) E. both (B) and (C)

c

Which of the following statements is NOT true of all mortgage-backed pass-through securities? A. They may not be repaid in full for 25 to 30 years B. They are viewed by the capital markets as having average maturities of much less than 30 years. C. Their interest and principal repayments are easily predictable. D. They pass through payments of principal and interest from the underlying pool of mortgages to the investors. E. All of the above statements are true.

a

Which of the following statements is NOT true regarding the risks of investing in mortgages? A. Extension risk is a concern when when interest rates fall. B. Default risk is usually low. C. If interest rates rise, fixed-rate mortgage values decrease. D. Prepayments tend to increase when interest rates decrease. E. All of the above statements are true.