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One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized."

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Compared to mortgage pass-though securities (MPTs) ,MBBs should be priced to provide:


A) Lower yields,because the MBB issuer bears lower prepayment risk
B) Higher yields,because the MBB issuer bears higher prepayment risks
C) The same yields,because of equivalent amounts of prepayment risk
D) None of the above

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A 25-year maturity mortgage-backed bond is issued.The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon.At issue,bond market investors require a 12 percent interest rate on the bond.What is the initial price on the bond?


A) $588
B) $5,686
C) $6,863
D) $14,270

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C

Which of the following is NOT a guarantee of Ginnie Mae (GNMA) ?


A) Timely payments of principal and interest
B) Settling accounts with servicer
C) All mortgages would be paid off at maturity
D) Upon default they will repay outstanding loan balance

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An optional delivery commitment,gives Fannie Mae the right (but not the obligation)to purchase mortgage loans from originators.

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When pricing mortgage pass-through securities,issuers use each of the following methods to include prepayment assumptions EXCEPT:


A) FHA prepayment experience
B) The pool factor technique
C) The PSA prepayment model
D) Constant rates of prepayment

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B

The Federal Home Loan Mortgage Corporation's (FHLMC)primary purpose is to provide liquidity for conventional mortgage originators just as FNMA and GNMA did for originators of FHA - VA mortgages.

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A 25-year maturity mortgage-backed bond is issued.The bond has a par value of $10,000 and promises to pay an 8 percent annual coupon.At issue,bond market investors require a 12 percent interest rate on the bond.Assume that 20 years after the bond is issued,bond market investors require a 15 percent interest rate on the bond.What is the market price of the bond?


A) $5,686
B) $6,863
C) $7,653
D) $14,270

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Which of the following developments assure mortgage investors they will receive interest and principal payments at little or no risk?


A) The availability of hazard and title insurance
B) The availability of mortgage default insurance and loan guarantees
C) The development of standardized loan underwriting,processing,and servicing
D) All of the above

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The investment rating for mortgage-backed bonds depends on each of the following EXCEPT:


A) Appraised value and DCR
B) Interest rates in mortgage pool
C) Extent of over collateralization
D) Initial price paid for the security

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Prices of mortgage pass-through securities are:


A) Unaffected by changes in interest rates
B) Related positively to changes in interest rates
C) More sensitive to declines in interest rates and less sensitive to increases in interest rates
D) Less sensitive to declines in interest rates and more sensitive to increases in interest rates

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The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.

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Issuers typically pledge 105 percent to 120 percent in mortgage collateral in excess of par value of the securities issued,in order to overcollateralized MBBs.

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The pass-through rate is the coupon rate of interest promised by the issuer of a pass-through security to the investor.In most instances,the pass-through rate is:


A) Equal to the average rate of interest on all mortgages in the underlying pool
B) Lower than the lowest rate of interest on any mortgage in the underlying mortgage pool
C) Higher than the highest rate of interest on any mortgage in the underlying mortgage pool
D) None of the above

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If a mortgage pool consists of five 10% FRMs totaling $500,000,five 9% FRMs totaling $450,000,and ten 8% FRMs totaling $750,000,what is the weighted average coupon (WAC) rate?


A) 8.75%
B) 8.85%
C) 9.00%
D) None of the above

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A mortgage pass-through security represents an undivided ownership interest in a pool of mortgages held by a trustee.

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Which of the following statements regarding mortgage-backed bonds is generally TRUE?


A) The total value of the MBBs issued usually equals the value of the mortgages in the underlying pool
B) Unlike corporate bonds,MBBs usually are issued with variable coupon rates of interest
C) Overcollateralization of the mortgage pool assures investors that the income from the mortgage will be sufficient to pay the interest on bonds and the principal upon maturity
D) All of the above

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C

All other conditions being the same,the more seasoned a mortgage is:


A) The greater the likelihood of prepayment
B) The greater the likelihood of default
C) The greater the likelihood that the mortgage will be carried to maturity
D) All of the above

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The standard PSA prepayment curve assumes prepayments of 0.2% per month for the first 30 months and then 0.5% per month thereafter.

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The Government National Mortgage Association (GNMA) was organized to perform three principal functions.Which of the following is NOT a function of GNMA?


A) Provide special assistance lending in support of federal programs
B) Manage and liquidate mortgages previously acquired by FNMA
C) Manage all secondary mortgage market operations
D) Provide a guarantee for FHA/VA mortgage pools that would provide a guarantee for mortgage backed securities

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