FINC Exam 3 Study

Assume you have a fixed rate mortgage with an annual interest rate of 5% and your monthly payments are $1,000. What are your monthly payments if the market interest rates increase 2%? A. $800 B. $1,000 C. $1,200 D. $1,700

B

Debt deflation refers to the decline in debt values as creditors agree to lower interest rates as an alternative to defaults. A. True B. False

B

Mortgages do not have a secondary market A. True B. False

B

Stage Three of a financial crisis in an advanced economy features A. a general increase in inflation. B. debt deflation. C. an increase in general price levels. D. a full-fledged financial crisis.

B

Typically, if investors expect to stay in the house or will pay off the loan in the near future (say, in less than 5 years), should they pay the discount points in exchange for lower monthly payments? (Hint: see the real world application example that we went through in class) A. Yes, they should pay the discount points B. No, they should not pay the discount points

B

In the world of securitization of mortgages, a CMO is a structured MBS where investor tranches have different rights to different sets of cash flows (think champagne fountain). This was created to protect the investor from: A. No-Doc risk B. Re-salerisk C. Defaultrisk D. Prepayment risk

D

The interest rate borrowers pay on their mortgages is determined by A. current long-term market rates. B. the term. C. the number of discount points. D. all of the above.

D

What is PMI? (hint: see the updated class slides to find the relevant information) A. Preferred mortgage investments- this is a type of mortgage securitization B. Primary mortgage investment - this is a type of MBS C. Perpetual mortgage increase-this is a type of mortgage where the payments increase over time. D. Private mortgage insurance - this is a type of insurance against default by the borrower

D

What are Asset Backed Securities?

are created by bundling and repackage loans - such as residential mortgage loans, commercial loans or student loans - and creating securities backed by those assets, which are then sold to investors.

List the Three Stages of a Financial Crisis

1. Initiation of Financial Crisis- Deterioration in financial institutions, asset price decline, increase in uncertainty, Adverse selection and moral hazard problems worsen. (Credit boom and bust) 2. Banking Crisis- Economic activity declines. 3. Debt deflation- Unanticipated decline in price level

A financial crisis occurs when information flows in financial markets experience a particularly large disruption. A. True B. False

A

A loan for borrowers who do not qualify for loans at the usual market rate of interest because of a poor credit rating or because the loan is larger than justified by their income is A. a subprime mortgage. B. a securitized mortgage. C. an insured mortgage. D. a graduated-payment mortgage.

A

During the last years of an amortizing mortgage loan, the lender applies A. most of the monthly payment to the outstanding principal balance. B. all of the monthly payment to the outstanding principal balance. C. most of the monthly payment to interest on the loan. D. all of the monthly payment to interest on the loan. E. the monthly payment equally to interest on the loan and the outstanding principal balance.

A

Fire sale means A. Banks sell assets quickly at extremely discounted price B. Banks purchase assets at a highly discounted price C. Banks sell assets at a regular market price D. Banks sell fire damaged assets

A

The signal of the end of a credit spree, with credit contracting rapidly.The process of deleveraging refers to A. cutbacks in lending by financial institutions. B. a reduction in debt owed by banks. C. both A and B. D. none of the above.

A

What is a mortgage? A. A long-term loan secured by real estate. B. Any loan that is for more than 5 years. C. Any amortized loan. D. Another name for monthly rent payments. E. All of the above.

A

What of the following is the major problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis? A. Moral Hazard problem, banks takes on greater risks B. Adverse Selection problem, borrowers who are more likely to default seeks loans

A

Which of the following is a reason that mortgages are well suited to be purchased via the web? A. This is a financial product—nothing really needs to be delivered B. Online lenders generally charge more than traditional banks. C. Customers build up loyalty to a particular provider in their purchasing of mortgages. D. Mortgages are customized per individual.

A

Who does PMI protect? A. It protects the mortgage lender B. It protects the mortgage borrower

A

What do we mean by securitization of mortgages? A. The mortgage is guaranteed by a government-sponsored enterprise (GSE) and is therefore secure. B. The mortgages are pooled and packaged as an MBS and this is sold to investors as a security. C. Mortgages are now regulated by the consumer protection board. D. When a mortgage has PMI it is considered a secure mortgage.

B

What is a credit boom? A. An explosion in a credit cycle, which can increase or decrease lending in the short-run B. Essentially a lending spree on the part of banks and other financial institutions C. When credit card receivables rise due to low initial interest rates

B

Which of the following is NOT a way that we characterize mortgages? A. Loan Terms B. Mortgage Issuer C. Mortgage Loan Amortization D. Mortgage Interest rates

B

Which of the following is true of mortgage interest rates? A. Longer-term mortgages have lower interest rates than shorter-term mortgages. B. Mortgage interest rates tend to track along with Treasury bond rates. C. Interest rates are higher on mortgage loans on which lenders charge points. D. All of the above are true.

B

Who will likely pay more in interest on a mortgage, John with a FICO score of 800 or Jerry with a FICO score of 350? A. John B. Jerry

B

Describe each form financial crises can take on..

Banking Crisis - Sudden collapse of the domestic banking system. Currency Crises - dramatic decline in the value of a country's currency—the crisis is often accompanies by a speculative attack in the foreign exchange market Sovereign Debt Crisis - Gov't unable to pay-off debts

A loan-servicing agent will A. package the loan for an investor. B. hold the loan in their investment portfolio. C. collect payments from the borrower. D. do both A and C of the above. E. do both B and C of the above.

C

After the Great Depression, the U.S. government introduced a sets of institutional changes aiming to make banking system less fragile and to prevent another financial crises. These institutional changes do NOT include: A. Deposit Insurance (FDIC) B. Central banks as the lender of last resort C. Set a limit on the maximum profits a bank can earn D. Separation of commercial banking and investment banking (Glass-Steagall Act 1933)

C

During the early years of an amortizing mortgage loan, the lender applies A. Most of the monthly payment to the outstanding principal balance. B. All of the monthly payment to the outstanding principal balance. C. Most of the monthly payment to interest on the loan. D. All of the monthly payment to interest on the loan. E. The monthly payment equally to interest on the loan and the outstanding principal balance.

C

If you have a fixed rate mortgage of 5% and the Feds decide to increase interest rates, what happens to your monthly payments? A. They increase B. They decrease C. They stay the same D. It depends on the amount of the Fed's increase

C

In an advanced economy, a financial crisis can begin in several ways, including A. mismanagement of financial liberalization or innovation. B. asset pricing booms and busts. C. an increase in uncertainty caused by failure of financial institutions. D. all of the above.

D

Securitization of mortgages involves which of the following? A. Guaranteeing that banks will be made whole if they lose money on a mortgage offering. B. The SEC (stands for Security and Exchange Commission) validating the mortgage qualifications. C. Pooling hundreds of mortgages to reduce the risk of either default or prepayment and servicing. D. Ensuring that all borrowers have FICO scores of at least 700..

C

Stage Two of a financial crisis in an advanced economy usually involves a ________ crisis. A. currency B. stock market C. banking D. commodities

C

What are discount points on a mortgage? A. Discount points are what you accumulate by paying a little extra every month. They will reduce the length of the mortgage. B. It is a lower interest rate on your mortgage due to having a high FICO score (over 700). C. It is paying more cash up-front in exchange for a lower interest rate over the life of the mortgage. D. It is how the lender computes your credit worthiness. The more points the better.

C

What do we call the type of mortgage where the interest rate can change over the life of the mortgage? A. Conventional Mortgage B. Fixed-RateMortgage C. Adjustable-Ratemortgage D. Type 1b mortgage

C

What do we call the type of mortgage where the interest rate can change over the life of the mortgage? A. Conventional Mortgage B. Fixed-Rate Mortgage C. Adjustable-Rate mortgage D. Type 1b mortgage

C

What does a FICO score measure? A. A bank's ability to cover their outstanding loans B. The lender's credit rating C. The borrower's credit rating D. The number of sub-prime loans

C

When asset prices fall following a boom, A. moral hazard may increase in companies that have lost net worth in the bust. B. financial institutions may see the assets on their balance sheets deteriorate, leading to deleveraging. C. both A and B are correct. D. none of the above are correct.

C

Which of the following does NOT led to the U.S. financial crisis of 2007-2009? A. Financial innovation in mortgage markets B. Housing price boom and bust C. An increase in interest rates preceding the crisis D. An expansion of subprime lending

C

Which of the following is true of mortgage interest rates? A. Longer-term mortgages have lower interest rates than shorter-term mortgages. B. Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest rates. C. In exchange for points, lenders reduce interest rates on mortgage loans. D. All of the above are true. E. Only A and B of the above are true.

C

Why are most mortgages immediately sold by the institutions that make the loan? A. It is required by law. B. Most loans are too risky to keep on the books. C. It frees up cash to originate another loan. D. Most mortgages are implemented by savings and loan banks and they do not service loans.

C

Debt deflation refers to A. an increase in net worth, leading to a relative fall in general debt levels. B. a decline in general debt levels due to deleveraging. C. a decline in bond prices as default rates rise. D. a decline in net worth as price levels fall while debt burden remains unchanged.

D

Financial crises A. are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms. B. occur when adverse selection and moral hazard problems in financial markets become more significant. C. frequently lead to sharp contractions in economic activity. D. are all of the above. E. are only A and B of the above.

D

Financial crises can take many forms which of these are one of the forms: A. banking crises B. currency crisis C. sovereign debt crises D. All of the above

D

Financial crises.. A. cause failures of financial intermediaries and leave only securities markets to channel funds from savers to borrowers. B. are a recent phenomenon that occur only in developing countries. C. invariably lead to debt deflation. D. are major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms.

D

What is loan servicing? A. Loan servicing is the process of the lender making a loan to a borrower. This term is only used in regards to mortgages. B. Loan servicers are the people in an investment bank who packaged together many mortgages into an MBS for selling to investors. C. Loan servicers did the pre-qualifying of potential borrowers as commercial banks could not keep up with the demand. D. Loan servicers collect monthly payments and manage the paper work associated with a loan, usually keeping a portion of the payments received.

D

Which of the following terms are found in mortgage loan contracts to protect the lender from financial loss? A. Collateral B. Down payment C. Private mortgage insurance D. All of the above

D

Which of the following are true of mortgages? A. A mortgage is a long-term loan secured by real estate. B. Borrowers pay off mortgages over time in some combination of principal and interest payments that result in full payment of the debt by maturity. C. Less than 65 percent of mortgage loans finance residential home purchases. D. All of the above are true of mortgages. E. Only A and B of the above are true of mortgages.

E

Which of the following is a factor that determines the interest rate that you will pay on a mortgage? A. The length of the loan. B. The amount of points paid up front. C. TheFICOscoreoftheborrower. D. The level of market interest rates. E. All of the above

E

A longer term mortgage has a higher interest rate TRUE OR FALSE?

TRUE

Mortgage rates should be higher than treasury bond rates, TRUE OR FALSE?

TRUE

TRUE OR FALSE- As cash balances fall, FIs must sell assets quickly at extremely discounted prices, further deteriorating their balance sheet

TRUE

TRUE OR FALSE.. When banks stop making loans>>financial friction rise>>borrowers are no longer able to fund their productive investment opportunities and they decrease their spending.

TRUE