FIN 306 FINAL EXAM LATEST
A pass-through security is best characterized as - ANSWERS-a security
with a pro rata claim to the underlying pool of assets
If a mortgage pass-through experiences larger prepayments than
expected early on in the life of the security, the result will be that pass-
through holders will receive _______ than expected cash flows early on
and _______ than expected cash flows later on. - ANSWERS-greater;
less
True or False
A CMO is a multiclass pass-through that helps investors choose the
amount of prepayment risk they will face. - ANSWERS-True
In a three-class sequential pay CMO, if we consider Class B holders as
having average prepayment risk, then Class A holders have
_____________ prepayment risk and Class C holders have
_____________ prepayment risk. - ANSWERS-above average; below
average
All are true about Mortgage Backed Bonds - ANSWERS--In MBBs, the
mortgages stay on the balance sheet while in a typical CMO, they are
removed from the balance sheet.
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PAGE
1
, FIN 306 FINAL EXAM LATEST
-The balance sheet becomes less liquid with MBBs; it becomes more
liquid with CMOs.
-The FDIC bears much of the risk of MBBs (mortgages used as
collateral for bonds)
True or False
Certain tranches of collateralized debt obligations (CDOs) typically
were rated higher than they should have been at the height of the
financial crisis. - ANSWERS-True
When a FI holds a mortage asset, it faces several regulatory taxes
including - ANSWERS-Capital requirements (typically 8% at a 50% risk
weight)
Reserve requirements
FDIC insurance premiums
Three government agencies or government-sponsored enterprises are
directly involved in the creation of mortgage-backed pass-through
securities - ANSWERS-Ginnie Mae (GNMA), Fannie Mae (FNMA),
and Freddie Mac (FHLMC).
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2
, FIN 306 FINAL EXAM LATEST
Mortgage loan securitization - ANSWERS-Reduces (or removes) the
regulatory tax burden, interest rate risk exposure, and liquidity risk
exposure that FIs face when they issue mortgages
prepayment risk - ANSWERS-the risk that mortgages underlying a
mortgage-backed security/pass-through will be paid off sooner than
expected due to a drop in interest rates. Investors reinvest the principal at
a lower rate going forward.
Class A CMO - ANSWERS-holders have the least prepayment
protection as all principal prepayments are first paid to this tranche until
they have been paid off in full
Class B CMO - ANSWERS-After all Class A C M Os have been retired,
remaining cash flows (after coupon payments) are used to retire Class B
bonds
Class B holders have higher prepayment protection than Class A
Class C CMO - ANSWERS-holders have the most prepayment
protection, and are attractive to insurance companies and pension funds.
This is the last tranche to receive principal payments
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PAGE
3
A pass-through security is best characterized as - ANSWERS-a security
with a pro rata claim to the underlying pool of assets
If a mortgage pass-through experiences larger prepayments than
expected early on in the life of the security, the result will be that pass-
through holders will receive _______ than expected cash flows early on
and _______ than expected cash flows later on. - ANSWERS-greater;
less
True or False
A CMO is a multiclass pass-through that helps investors choose the
amount of prepayment risk they will face. - ANSWERS-True
In a three-class sequential pay CMO, if we consider Class B holders as
having average prepayment risk, then Class A holders have
_____________ prepayment risk and Class C holders have
_____________ prepayment risk. - ANSWERS-above average; below
average
All are true about Mortgage Backed Bonds - ANSWERS--In MBBs, the
mortgages stay on the balance sheet while in a typical CMO, they are
removed from the balance sheet.
END OF
PAGE
1
, FIN 306 FINAL EXAM LATEST
-The balance sheet becomes less liquid with MBBs; it becomes more
liquid with CMOs.
-The FDIC bears much of the risk of MBBs (mortgages used as
collateral for bonds)
True or False
Certain tranches of collateralized debt obligations (CDOs) typically
were rated higher than they should have been at the height of the
financial crisis. - ANSWERS-True
When a FI holds a mortage asset, it faces several regulatory taxes
including - ANSWERS-Capital requirements (typically 8% at a 50% risk
weight)
Reserve requirements
FDIC insurance premiums
Three government agencies or government-sponsored enterprises are
directly involved in the creation of mortgage-backed pass-through
securities - ANSWERS-Ginnie Mae (GNMA), Fannie Mae (FNMA),
and Freddie Mac (FHLMC).
END OF
PAGE
2
, FIN 306 FINAL EXAM LATEST
Mortgage loan securitization - ANSWERS-Reduces (or removes) the
regulatory tax burden, interest rate risk exposure, and liquidity risk
exposure that FIs face when they issue mortgages
prepayment risk - ANSWERS-the risk that mortgages underlying a
mortgage-backed security/pass-through will be paid off sooner than
expected due to a drop in interest rates. Investors reinvest the principal at
a lower rate going forward.
Class A CMO - ANSWERS-holders have the least prepayment
protection as all principal prepayments are first paid to this tranche until
they have been paid off in full
Class B CMO - ANSWERS-After all Class A C M Os have been retired,
remaining cash flows (after coupon payments) are used to retire Class B
bonds
Class B holders have higher prepayment protection than Class A
Class C CMO - ANSWERS-holders have the most prepayment
protection, and are attractive to insurance companies and pension funds.
This is the last tranche to receive principal payments
END OF
PAGE
3
