FIN 306 Final Exam 2026|2027 Advanced Practice Questions and
Answers with Complete A+ Solutions 100% Correct!!!
When a FI holds a mortage asset, it faces several regulatory taxes including - Correct Answer -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 - Correct Answer -Ginnie Mae (GNMA), Fannie Mae (FNMA), and
Freddie Mac (FHLMC).
Mortgage loan securitization - Correct Answer -Reduces (or removes) the regulatory tax burden, interest
rate risk exposure, and liquidity risk exposure that FIs face when they issue mortgages
prepayment risk - Correct Answer -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 - Correct Answer -holders have the least prepayment protection as all principal
prepayments are first paid to this tranche until they have been paid off in full
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, Class B CMO - Correct Answer -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 - Correct Answer -holders have the most prepayment protection, and are attractive to
insurance companies and pension funds. This is the last tranche to receive principal payments
MBBs (Mortgage Backed Bonds) differ from pass-throughs and CMOs in two key areas - Correct Answer -
-Mortgage backing M B Bs normally remain on the balance sheet
-Cash flows on mortgages backing the bond are not necessarily directly connected to interest and
principal payment on the MBB
CLOs - Correct Answer -collateralized loan obligations containing high-quality, low-default risk loans
CDOs - Correct Answer -collateralized debt obligations containing a diversified collection of junk bonds or
risky bank loans
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Answers with Complete A+ Solutions 100% Correct!!!
When a FI holds a mortage asset, it faces several regulatory taxes including - Correct Answer -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 - Correct Answer -Ginnie Mae (GNMA), Fannie Mae (FNMA), and
Freddie Mac (FHLMC).
Mortgage loan securitization - Correct Answer -Reduces (or removes) the regulatory tax burden, interest
rate risk exposure, and liquidity risk exposure that FIs face when they issue mortgages
prepayment risk - Correct Answer -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 - Correct Answer -holders have the least prepayment protection as all principal
prepayments are first paid to this tranche until they have been paid off in full
1|Page
, Class B CMO - Correct Answer -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 - Correct Answer -holders have the most prepayment protection, and are attractive to
insurance companies and pension funds. This is the last tranche to receive principal payments
MBBs (Mortgage Backed Bonds) differ from pass-throughs and CMOs in two key areas - Correct Answer -
-Mortgage backing M B Bs normally remain on the balance sheet
-Cash flows on mortgages backing the bond are not necessarily directly connected to interest and
principal payment on the MBB
CLOs - Correct Answer -collateralized loan obligations containing high-quality, low-default risk loans
CDOs - Correct Answer -collateralized debt obligations containing a diversified collection of junk bonds or
risky bank loans
2|Page
