Question 1

Which of the following statements regarding subprime mortgages is TRUE?

Accepted Answer

A)  Subprime mortgages are not Ginnie Mae guaranteed,so CMO investors are exposed to default risk
B)  Subprime mortgages are not Ginnie Mae guaranteed,so securities backed by subprime mortgages cannot be issued
C)  CMOs backed by subprime mortgages cannot be used as collateral for CDOs
D)  Due to diversification,securities backed by subprime loans are of no more risk than those back by prime loansE) B) and D)
F) B) and C) A

Question 2

Which of the following does NOT increase the noncredit risks of CDOs?

Accepted Answer

A)  Collateral management risk
B)  Certainty in average life of CDO tranches
C)  Higher correlation and liquidity
D)  None of the aboveE) None of the above
F) All of the above

Question 3

A calamity call,which allows the issuer to recall all securities for a specified time,can be used in each of the following situations EXCEPT when:

Accepted Answer

A)  Investors want to cash out their positions
B)  Interest rates decline sharply
C)  Prepayments decline sharply
D)  Reinvestment rates are below what was promised to investorsE) C) and D)
F) B) and D)

Question 4

The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages.

Accepted Answer

A) True 
 B)False

Question 5

The CMO investor assumes the prepayment risk of the underlying mortgages,although the CMO modifies how the risk is allocated.

Accepted Answer

A) True 
 B)False

Question 6

A tranche that has a coupon interest rate that adjusts in the opposite direction to its index is referred to as:

Accepted Answer

A)  Reverse floater tranche
B)  Inverse floater tranche
C)  Upside-down floater tranche
D)  Backwards floater trancheE) A) and B)
F) A) and C)

Question 7

A derivative security derives its value from another security,index,or financial claim.

Accepted Answer

A) True 
 B)False

Question 8

In CMO terminology,planned amortization classes (PACs)are also known as companion tranches.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is FALSE regarding a planned amortization class (PAC) tranche?

Accepted Answer

A)  It has the greatest degree of cash flow certainty
B)  Variable payments are received
C)  Payments are received over predetermined period of time
D)  Payments are received under a range of prepayment scenariosE) None of the above
F) A) and B)

Question 10

CDO managers raises capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments.

Accepted Answer

A) True 
 B)False  False

Question 11

A CMO does not completely eliminate prepayment risk.

Accepted Answer

A) True 
 B)False

Question 12

For which of the following investments does the issuer bear all of the prepayment risk?

Accepted Answer

A)  CMOs
B)  MBBs
C)  MPTs
D)  MPTBsE) None of the above
F) C) and D)

Question 13

REMICs were created in order to avoid taxes:

Accepted Answer

A)  Entirely
B)  At the investor level
C)  At the entity level
D)  No taxes can be avoided.E) A) and D)
F) None of the above

Question 14

These items are hybrid securities that contain elements of mortgage-backed bonds and mortgage pass-throughs:

Accepted Answer

A)  MPTBs
B)  CDOs
C)  CMOs
D)  TranchesE) C) and D)
F) B) and D)

Question 15

In comparison to mortgage pass-though securities,CMOs attract a broader class of investors because,by prioritizing cash flows,they can offer more specific maturities.

Accepted Answer

A) True 
 B)False

Question 16

The CMO is a considered a marketing innovation as well as a financial innovation,because it is the first security in the secondary mortgage market to have run a prime-time television ad.

Accepted Answer

A) True 
 B)False

Question 17

Convexity is a gauge for which of the following?

Accepted Answer

A)  Profitability
B)  Return
C)  Sensitivity
D)  DurationE) A) and B)
F) A) and C)

Question 18

For which of the following investments is the exact date of maturity known?

Accepted Answer

A)  CMOs
B)  MBBs
C)  MPTs
D)  MPTBsE) C) and D)
F) A) and C) B

Question 19

The total interest collected from the pool will be ________ if prepayment accelerates; therefore,the dollar spread between interest inflow and outflow becomes ________.

Accepted Answer

A)  Lower,smaller
B)  Lower,wider
C)  Higher,smaller
D)  Higher,widerE) All of the above
F) B) and C)

Question 20

Which of the following investments in NOT a debt obligation of the issuer?

Accepted Answer

A)  CMOs
B)  MBBs
C)  MPTs
D)  MPTBsE) A) and B)
F) C) and D)

Exam 20: The Secondary Mortgage Market: Cmos and Derivative Securities

Which of the following statements regarding subprime mortgages is TRUE?

Correct AnswerverifiedA

Which of the following does NOT increase the noncredit risks of CDOs?

Correct AnswerverifiedShow Answer

A calamity call,which allows the issuer to recall all securities for a specified time,can be used in each of the following situations EXCEPT when:

Correct AnswerverifiedShow Answer

The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages.

Correct AnswerverifiedShow Answer

The CMO investor assumes the prepayment risk of the underlying mortgages,although the CMO modifies how the risk is allocated.

Correct AnswerverifiedShow Answer

A tranche that has a coupon interest rate that adjusts in the opposite direction to its index is referred to as:

Correct AnswerverifiedShow Answer

A derivative security derives its value from another security,index,or financial claim.

Correct AnswerverifiedShow Answer

In CMO terminology,planned amortization classes (PACs)are also known as companion tranches.

Correct AnswerverifiedShow Answer

Which of the following is FALSE regarding a planned amortization class (PAC) tranche?

Correct AnswerverifiedShow Answer

CDO managers raises capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments.

Correct AnswerverifiedFalse

A CMO does not completely eliminate prepayment risk.

Correct AnswerverifiedShow Answer

For which of the following investments does the issuer bear all of the prepayment risk?

Correct AnswerverifiedShow Answer

REMICs were created in order to avoid taxes:

Correct AnswerverifiedShow Answer

These items are hybrid securities that contain elements of mortgage-backed bonds and mortgage pass-throughs:

Correct AnswerverifiedShow Answer

In comparison to mortgage pass-though securities,CMOs attract a broader class of investors because,by prioritizing cash flows,they can offer more specific maturities.

Correct AnswerverifiedShow Answer

The CMO is a considered a marketing innovation as well as a financial innovation,because it is the first security in the secondary mortgage market to have run a prime-time television ad.

Correct AnswerverifiedShow Answer

Convexity is a gauge for which of the following?

Correct AnswerverifiedShow Answer

For which of the following investments is the exact date of maturity known?

Correct AnswerverifiedB

The total interest collected from the pool will be ________ if prepayment accelerates; therefore,the dollar spread between interest inflow and outflow becomes ________.

Correct AnswerverifiedShow Answer

Which of the following investments in NOT a debt obligation of the issuer?

Correct AnswerverifiedShow Answer

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A

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False

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B

The total interest collected from the pool will be if prepayment accelerates; therefore,the dollar spread between interest inflow and outflow becomes .

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