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Banking
Q:
Commercial mortgage-backed securities:a. Are issued by private entities.b. Do not have any implicit or explicit government guarantee.c. Must be credit enhanced.d. Are backed by a pool of commercial mortgage loans.e. All of the above.
Q:
Computing a yield for a mortgage-backed security is difficulty because:a. It requires a determination of the cash flow.b. The cash flow is uncertain because of prepayments.c. Assumptions about prepayments must be made.d. All of the above.e. None of the above.
Q:
The risk resulting from a decline in mortgage rates that will shorten the life of a mortgage is called:a. Prepayment risk.b. Contraction risk.c. Extension risk.d. Price risk.e. None of the above.
Q:
A CMO is structured with various bond classes referred to as:a. Serial bonds.b. Tranches.c. Class.d. Series.e. None of the above.
Q:
A collateralized mortgage obligation (CMO):a. Cannot eliminate prepayment risk.b. Redistributes the cash flows of pools of mortgage pass-through securities to different bond classes.c. Distributes the various forms of prepayment risk among different classes of bondholders.d. b and c only.e. All of the above.
Q:
Prepayment risk, which is associated with the risk of prepayments, consists of:a. Default risk.b. Contraction risk.c. Extension risk. d. b and c only.e. All of the above.
Q:
Non-agency mortgage pass-through securities are supported by credit enhancements such as:a. Corporate guarantees.b. Pool insurance from a mortgage insurance company.c. A bank letter of credit.d. Senior/subordinated interests.e. All of the above.
Q:
Non-agency pass-throughs have been issued by conduits of:a. Commercial banks.b. Investment banking firms.c. Entities not associated with either commercial banks or investment banking firms.d. a and b only.e. All of the above.
Q:
The security issued by Freddie Mac is called a:a. Participation certificate.b. Mortgage-backed security.c. Non-agency mortgage pass-through security.d. Stripped mortgage-backed security.e. None of the above.
Q:
The pass-through securities issued by Ginnie Mae, Freddie Mac, and Fannie Mae:a. Are guaranteed by these agencies.b. Increase the supply of capital to the residential mortgage market.c. Provide support for an active secondary market.d. b and c only.e. All of the above.
Q:
The cash flows of a mortgage pass-through security consist of:a. Interest payments.b. Repayment of principal.c. Any prepayments.d. a and b only.e. All of the above.
Q:
When a mortgage is included in a pool of mortgages that is used as collateral for a mortgage pass-through security, the mortgage is said to be:a. Securitized.b. Collateralized.c. Guaranteed.d. Standardized.e. Stripped.
Q:
Freddie Mac and Fannie Mae created mortgage pass-through securities by:a. Purchasing mortgages.b. Pooling these mortgages.c. Issuing securities using the pool of mortgages as collateral.d. b and c only.e. All of the above.
Q:
Fannie Mae, Ginnie Mae, and Freddie Mac helped to create a secondary market for mortgages by:a. Issuing conventional mortgage loans.b. Purchasing conventional mortgage loans.c. Issuing FHA- and VA-insured mortgage loans.d. Providing mortgage insurance.e. None of the above.
Q:
The agency charged with the responsibility to create a liquid secondary market for FHA- and VA-insured mortgages is:a. Ginnie Mae.b. Fannie Mae.c. Freddie Mac.d. FHLB.e. None of the above.
Q:
In response to the Great Depression and its effects on financial markets, the Federal Reserve provided liquidity for thrifts by the creation of the:a. Federal Home Loan Banks.b. Federal Housing Administration.c. Fannie Mae.d. Ginnie Mae.e. Freddie Mac.
Q:
With asset securitization more than one institution may be involved so that a thrift or bank does not have to:a. Absorb the credit risk.b. Service the mortgage.c. Provide the funding.d. b and c only.e. All of the above.
Q:
Asset securitization calls for a financial intermediary to:a. Originate a loan.b. Retain the loan in its portfolio of assets.c. Service the loan.d. Obtain funds from the public to finance its assets.e. All of the above.
Q:
The driving force in the development of a strong secondary market for residential mortgage loans was a financial innovation, which involves:a. The pooling of mortgages.b. The issuance of securities collateralized by these mortgages.c. Asset securitization.d. A and b only.e. All of the above.
Q:
The basic mortgage-backed security is the:a. Collateralized mortgage obligation.b. Stripped mortgage-backed security.c. Mortgage pass-through security.d. Derivative mortgage-backed security.e. None of the above.
Q:
Compare and contrast the fixed-rate mortgage and the adjustable-rate mortgage.
Q:
Describe the risks associated with investing in mortgages.
Q:
Explain the deficiencies of the traditional mortgage loan.
Q:
The effect of the prepayment right is that the cash flows from a mortgage is not known with certainty. This uncertainty is called:a. Cash flow risk.b. Prepayment risk.c. Marketability risk.d. Price risk.e. Credit risk.
Q:
Mortgage loans tend to be rather illiquid because:a. There is no secondary market.b. They are large.c. They are irreversible.d. They are indivisible.e. b and d only.
Q:
By investing in mortgage loans, investors face:a. Credit risk.b. Liquidity risk.c. Price risk.d. Prepayment risk.e. All of the above.
Q:
For a commercial mortgage, prepayment protection is provided by:a. Prepayment lockout.b. Defeasance.c. Prepayment penalty points.d. Yield maintenance charges.e. All of the above.
Q:
A mortgage design that is created for senior homeowners who want to convert their home equity into cash is the.a. Convertible mortgage. b. Reverse mortgage.c. Traditional mortgage.d. Growing-equity mortgage.e. Subprime loans.
Q:
A growing-equity mortgage:a. Does have negative amortization.b. Has an adjustable-rate mortgage whose monthly mortgage payments increase over time..c. Has a fixed-rate mortgage whose monthly mortgage payments increase over time.d. Effectively shortens the life of the mortgage.e. c and d only.
Q:
Mortgage designs, which have been offered to solve the tilt problem include the:a. Graduated-payment mortgage.b. Price-level-adjusted mortgage.c. Dual-rate mortgage.d. All of the above.e. None of the above.
Q:
In the presence of inflation-driven high interest rates, mortgage repayment in real terms is no longer level, but instead starts high and ends low, shutting off many would-be-borrowers. This problem is referred to as:a. Pipeline risk.b. Mismatch problem.c. Tilt problem.d. Maturity problem.e. Inflation problem.
Q:
Traditional mortgages were financed mainly by depository institutions with very short-term funds, even though a mortgage is a very long-term instrument. This mismatch of maturities was solved with the:a. Adjustable-rate mortgage.b. Graduated-payment mortgage.c. Balloon mortgage.d. Reverse mortgage.e. Growing equity mortgage.
Q:
The traditional type of mortgage is characterized by:a. A fixed rate.b. Level, nominal, payment.c. Full amortization.d. a and b only.e. All of the above.
Q:
Fallout risk is the risk that:a. The value of the pipeline will be adversely affected if mortgage rates rise.b. Applicants will not complete the transaction by purchasing the property with the funds borrowed from the mortgage originator.c. Those who were issued commitment letters will not close.d. b and c only.e. All of the above.
Q:
The risk(s) associated with originating mortgages include(s):a. Price risk.b. Fallout risk.c. Pipeline risk.d. All of the above.e. a and b only.
Q:
A mortgage loan that meets an agency's underwriting standards is referred to as a:a. Conforming mortgage.b. Nonconforming mortgage.c. Conventional mortgage.d. Nonconventional mortgage.e. None of the above.
Q:
The mortgage originator has several choices as to the mortgages acquired including:a. Holding the mortgages in a portfolio.b. Selling the mortgages to investors.c. Using the mortgages as collateral for the issuance of a security.d. a and b only.e. All of the above.
Q:
A commitment letter is sent to the applicant:a. When the lender guarantees the funds.b. When the lender decides to lend the funds.c. When the lender has found suitable property for purchase.d. a and b only.e. All of the above.
Q:
The two principal factors in determining whether or not to lend funds are the:a. Loan-to-value ratio.b. Payment-to-income ratio.c. Times-interest-earned ratio.d. a and b only.e. b and c only.
Q:
Mortgage originators may generate income from mortgage activity in the form of:a. Origination fees.b. Secondary market profits.c. Servicing fees.d. a and b only.e. All of the above.
Q:
The principal originators of residential mortgage loans are:a. Life insurance companies.b. Thrifts.c. Commercial banks.d. Mortgage bankers. e. b, c, and d only.
Q:
Mortgage insurance to provide a guarantee for the fulfillment of the borrower's obligations is provided by the:a. Federal Housing Administration.b. Veterans Administration.c. Rural Housing Service insurance.d. PMI insurance.e. a, b, and c only.
Q:
When a loan is based solely on the credit of the borrower and on the collateral for the mortgage, the mortgage is said to be a:a. Fixed-rate mortgage.b. Adjustable rate mortgage.c. Conventional mortgage.d. Guarantee.e. None of the above.
Q:
Discuss why a municipality would want to issue a taxable municipal bond, thereby paying a higher yield than if it issued a tax-exempt municipal bond.
Q:
Explain the yield relationship between municipal securities and taxable bonds.
Q:
Describe the risks specific to investments in municipal securities.
Q:
If the escrow is properly structured, prerefunded bonds are among the safest of all municipal securities since they are collateralized by:a. U.S. government obligations.b. State general obligation bonds.c. The general taxing power of the issuer.d. Insurance policies.e. None of the above.
Q:
A general obligation bond is said to be double-barreled when it is secured by:a. The issuer's general taxing power.b. Certain identified fees, grants, and special charges provide additional revenues from outside the general fund.c. A specified number of fixed assets.d. a and b only.e. All of the above.
Q:
Congress has specifically exempted municipal securities from:a. The registration requirements of the Securities Act of 1933.b. The periodic reporting requirements of the Securities Exchange Act of 1934.c. Antifraud provisions applicable to municipal securities.d. a and b only.e. All of the above.
Q:
In general, the municipal yield curve is:a. Inverted.b. Upward sloping.c. Downward sloping.d. Flat.e. None of the above.
Q:
Because of the tax-exempt feature of municipal bonds, the yield on municipal securities compared to Treasuries with the same maturity is:a. Less.b. Greater.c. The same.d. Unknown.e. None of the above.
Q:
Municipal bonds are generally traded and quoted in terms of the:a. Basis price.b. Yield-to-maturity.c. Yield-to-call.d. b and c only.e. All of the above.
Q:
Municipal bonds are traded in the:a. Over-the-counter market.b. Private market.c. Third market.d. Dutch auction market.e. None of the above.
Q:
Usually, state and local governments require a competitive sale to be announced in a recognized financial publication, such as:a. Barron's.b. The Bond Buyer.c. Institutional Investor.d. Financial Analyst Journal.e. None of the above.
Q:
Most states mandate that general obligation issues be marketed through:a. Private placement.b. Competitive bidding.c. Best efforts underwriting.d. Direct negotiations.e. None of the above.
Q:
The risk that the federal income tax rate will be reduced, resulting in a decline in the value of municipal bonds, is called:a. Political risk.b. Tax risk.c. Government risk.d. Tax law risk.e. None of the above.
Q:
Regarding the default risk associated with municipal bonds:a. Over the past 30 years there have been relatively few defaults.b. From 1940 to the present they have demonstrated very little default risk.c. They historically had little default risk but it has increased dramatically in the past three decades.d. Their default risk is constantly fluctuating.e. None of the above.
Q:
To evaluate general obligation bonds, commercial rating companies assess:a. Information on the issuer's debt structure and overall debt burden.b. The issuer's ability and political discipline to maintain sound budgetary policy.c. The issuer's overall socioeconomic environment.d. Local taxes and intergovernmental revenues available to the issuer.e. All of the above.
Q:
Municipal bonds may be retired with a:a. Serial maturity structure.b. Term maturity structure.c. Combination of the serial and term maturity structures.d. None of the above. e. All of the above.
Q:
Municipal securities issued for periods up to three years are considered:a. Long term.b. Intermediate term.c. Short term.d. All of the above.e. None of the above.
Q:
Revenue bonds have a security structure where the bond issuer:a. Pledges to the bondholders the revenues generated by the operating projects financed.b. Secures the bonds by its unlimited taxing power.c. Collateralizes the bonds with specific assets.d. All of the above.e. None of the above.
Q:
General obligations bonds are secured by:a. The issuer's general taxing power.b. A pledge of special fees/operating revenue from the service provided.c. FDIC insurance.d. a and b only.e. All of the above.
Q:
Municipal securities secured by some form of tax revenues include:a. General obligation debt.b. Appropriation-backed obligations.c. Moral obligation bonds.d. Debt obligations supported by public credit enhancement programs.e. All of the above.
Q:
Municipal securities are issued for various purposes including:a. Anticipation of the receipt of funds from taxes.b. Financing long-term capital projects.c. Financing long-term budget deficits that arise from current operations.d. b and c only.e. All of the above.
Q:
Investors in municipal bonds whose primary interest is in opportunities to benefit from leveraged strategies that seek to generate capital gains include:a. Hedge funds.b. Arbitrageurs.c. Mutual funds.d. a and b only.e. All of the above.
Q:
Municipal bonds are securities issued by:a. The federal government.b. State governments.c. Local governments.d. Municipalities.e. b, c, and d only.
Q:
Discuss electronic bond trading.
Q:
Explain the advantages and disadvantages of a callable bond.
Q:
Compare and contrast preferred stock and corporate debt.
Q:
Corporations receive what federal tax exemption on qualified dividends of preferred stock?a. 0%.b. 30%.c. 50%. d. 70%.e. None of the above.
Q:
A type of preferred stock in which the dividend payment accrues until it is fully paid is called:a. Perpetual preferred stock. b. Cumulative preferred stock.c. Convertible preferred stock.d. Noncumulative preferred stock.e. None of the above.
Q:
MTNs created when the issuer simultaneously transacts in the derivative markets are called:a. Structured notes.b. Floating-rate securities.c. Swaps.d. a and b only.e. None of the above.
Q:
In contrast to corporate debt, medium-term notes (MTNs) are:a. Distributed to investors on a best efforts basis.b. Are sold in large offerings.c. Are sold on an intermittent basis.d. a and c only.e. All of the above.
Q:
Deferred-interest bonds:a. Sell at a deep discount.b. Do not pay interest for an initial period.c. Are sometimes referred to as zero-coupon bonds.d. a and b only.e. All of the above.
Q:
Corporate bond issuers use the proceeds from a bond sale for:a. Working capital.b. Expansion of facilities.c. Refinancing of outstanding debt.d. Financing takeovers.e. All of the above.
Q:
Medium-term notes are:a. Corporate debt obligations that are offered continuously to investors.b. Sold with securities from 9 months to 30 years.c. Not registered with the SEC.d. a and b only.e. All of the above.
Q:
The bondholder is given the right to sell the issue back to the issuer at the par value on designated dates in a:a. Convertible bond.b. Exchangeable bond.c. Putable bond.d. Warrant.e. None of the above.
Q:
The provision in a bond indenture that may require the issuer to retire a specified portion of an issue each year is the:a. Call provision.b. Sinking fund provision.c. Refunding provision.d. Warrant.e. None of the above.
Q:
If the issuer of a bond has the choice to retire all or part of an issue prior to maturity, the bondholder is exposed to:a. Call risk.b. Timing risk.c. Refunding risk.d. a and b only.e. All of the above.
Q:
As a general rule, bonds are callable at:a. Maturity only.b. A premium above par.c. The coupon rate.d. The yield-to-maturity.e. None of the above.