Q&A Hero

Q: Which of the following is NOT true with respect to a growing-equity mortgage? a. It is similar to a graduated-payment mortgage. b. The monthly payments on the mortgage are initially small. c. The monthly payments increase throughout the life of the mortgage. d. The monthly payments increase for the first 5 to 10 years of the mortgage and then level off.

Q: ​Mortgage companies specialize in a. ​purchasing mortgages originated by other financial institutions. b. ​investing and maintaining mortgages that they create. c. ​originating mortgages and selling those mortgages. d. ​borrowing money through the creation of mortgages that is used to invest in real estate.

Q: Which of the following was a major contributor to the credit crisis? a. strict criteria applied by mortgage originators b. liberal criteria applied by mortgage originators c. very strict credit ratings applied to mortgage-backed securities d. fixed-rate mortgages with long terms to maturity

Q: ​A mortgage with low initial payments that increase over time without ever leveling off is a a. ​graduated payment mortgage. b. ​growing-equity mortgage. c. ​second mortgage. d. ​shared-appreciation mortgage.

Q: ​At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time. a. ​positively; positively b. ​positively; inversely c. ​Inversely; positively d. ​inversely; inversely

Q: ​An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates. a. ​stable; decreasing b. ​increasing; stable c. ​increasing; decreasing d. ​decreasing; increasing

Q: Which of the following are important criteria that financial institutions consider when assessing the creditworthiness of a prospective borrower for a mortgage? a. the down payment the borrower will make b. the borrowers debt-to-income ratio c. the borrowers credit score d. all of the above

Q: An adjustable-rate mortgage increases interest rate risk for the ____, but reduces interest rate risk for the ____. a. originator; borrower b. borrower; originator c. government; originator d. None of these are correct.

Q: ​A financial institution has a higher degree of interest rate risk on a ____ than a ____. a. ​30-year fixed-rate mortgage; 15-year fixed-rate mortgage b. ​30-year variable-rate mortgage; 30-year fixed-rate mortgage c. ​15-year fixed-rate mortgage; 30-year fixed-rate mortgage d. ​15-year variable-rate mortgage; 15-year fixed-rate mortgage

Q: Which of the following was part of the U.S. governments response to the credit crisis? a. Troubled Asset Relief Program (TARP) b. Housing and Economic Recovery Act c. Homeowners Mortgage Guarantee Act d. Troubled Asset Relief Program (TARP) AND Housing and Economic Recovery Act

Q: ​Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically a. ​2 percent per year and 5 percent for the mortgage lifetime. b. ​5 percent per year and 15 percent for the mortgage lifetime. c. ​0 percent per year and 10 percent for the mortgage lifetime. d. ​3 percent per year and 8 percent for the mortgage lifetime.

Q: ​Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage? a. ​second mortgage b. ​growing-equity mortgage c. ​graduated-payment mortgage d. ​shared-appreciation mortgage

Q: ​A ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off. a. ​graduated-payment mortgage b. ​growing-equity mortgage c. ​second mortgage d. ​shared-appreciation mortgage

Q: The interest rate on a second mortgage is ____ the rate on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default. a. higher than; behind b. equal to that; equal to c. lower than; ahead of d. higher than; ahead of e. lower than; behind

Q: ____ was created in 1968 as a corporation that is wholly owned by the federal government. It guarantees payment on FHA and VA mortgages that meet specific criteria. a. Freddie Mac b. Ginnie Mae c. Fannie Mae d. None of these are correct.

Q: ___ economic growth will probably ____ the risk premium on mortgages and cause the price of mortgages in the secondary market to _____. a. Strong; increase; decrease b. Strong; increase; increase c. Weak; increase; decrease d. Weak; increase; increase e. Weak; decrease; decrease

Q: ​For any given interest rate, the shorter the life of the mortgage, the ____ the monthly payment and the ____ the total payments over the life of the mortgage. a. ​greater; greater b. ​greater; lower c. ​lower; greater d. ​lower; lower

Q: Mortgage-backed securities are assigned ratings by a. rating agencies. b. the U.S. Treasury c. the Federal Reserve. d. the mortgage originator.

Q: Which of the following is NOT a common type of mortgage-backed security according to your text? a. FHLMA (Freddie Mac) participation certificates (PCs) b. collateralized mortgage obligations (CMOs) c. balloon-payment mortgage certificates d. private-label pass-through securities e. All of these are common types of mortgage pass-through securities.

Q: ​The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is primarily attributable to a. ​interest rate risk. b. ​reinvestment rate risk. c. ​credit risk. d. ​insurance risk.

Q: ​In the earlier years of a mortgage, a. ​most of the monthly payment reflects principal reduction. b. ​most of the monthly payment reflects interest. c. ​about half of the monthly payment reflects interest. d. ​all of the monthly payment reflects principal reduction.

Q: Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they a. were unwilling to finance new mortgages. b. invested heavily in balloon-payment mortgages. c. invested only in prime mortgages that offered very low returns. d. invested heavily in subprime mortgages.

Q: ​Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____ risk, because they commonly use funds obtained from short-term customer deposits to make long-term mortgage loans. a. ​exchange rate b. ​prepayment c. ​reinvestment rate d. ​interest rate e. ​exchange rate

Q: In a short sale of a home a. the lender forecloses and then sells the home for less than what is owed on the mortgage. b. the lender allows the homeowner to sell the home for less than what is owed on the mortgage. c. the lender does not recover the full amount of the mortgage. d. the lender allows the homeowner to sell the home for less than what is owed on the mortgage AND the lender does not recover the full amount of the mortgage. e. the lender forecloses and then sells the home for less than what is owed on the mortgage AND the lender does not recover the full amount of the mortgage.

Q: ____ mortgages enable more people with relatively lower income, or high existing debt, or a small down payment to purchase homes. a. Prime b. Balloon c. Amortized d. Subprime

Q: Federally insured mortgages guarantee a. loan repayment to the lending financial institution. b. that the interest rate will not increase during the life of the mortgage. c. the lending financial institution a selling price for the mortgage in the secondary market. d. All of these are correct.

Q: Which of the following will typically require the borrower to ultimately request a new mortgage? a. graduated-payment mortgage (GPM) b. growing-equity mortgage c. balloon-payment mortgage d. shared-appreciation mortgage

Q: The probability that a borrower will default (credit risk) is influenced by all of the following EXCEPT a. economic conditions. b. the level of equity invested by the borrower. c. the borrower's debt-to-income level. d. the borrower's credit score. e. Credit risk is affected by all of these.

Q: The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity. a. primary b. secondary c. money d. None of these are correct.

Q: At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage. a. below b. above c. equal to d. All of these are very common.

Q: ​Rates for adjustable-rate mortgages are commonly tied to the a. ​average prime rate over the previous year. b. ​Fed's discount rate over the previous year. c. ​average Treasury bill rate over the previous year. d. ​average Treasury bond rate over the previous year.

Q: ​A(n) _________ problem occurs when a person or institution does not have to bear the full consequences of its behavior and therefore assumes more risk than it otherwise would. a. ​asymmetric information b. ​moral hazard c. ​risk adjustment d. ​specific hazard

Q: A mortgage contract specifies a. the interest rate. b. the collateral backing the loan. c. whether the interest rate is fixed or adjustable. d. the maturity. e. all of the above.

Q: ​____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates. a. ​Interest rate b. ​Credit c. ​Prepayment d. ​Reinvestment rate

Q: A balloon-payment mortgage requires only interest payments for a three- to five-year period. At the end of this period, full payment of the principal (the balloon payment) is required. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

Q: "Securitization" refers to the private insurance of conventional mortgages. a. True b. False

Q: Financial institutions may sell credit default swaps on mortgages if they expect defaults on many mortgages. a. True b. False

Q: Borrowers who have a lower level of income relative to their periodic loan payments are more likely to default on their mortgages. a. True b. False

Q: The secondary mortgage market accommodates originators of mortgages who desire to sell their mortgages before maturity. a. True b. False

Q: Financial institutions may purchase credit default swaps on mortgages if they expect defaults on many mortgages. a. True b. False

Q: Mortgage-backed securities are commonly contained within collateralized debt obligations. a. True b. False

Q: Mortgages are rarely sold in the secondary market. a. True b. False

Q: During the early years of a mortgage, most of the monthly payment reflects principal. a. True b. False

Q: Strong economic growth tends to reduce the probability that borrowers will default on their mortgage payments and therefore tends to decrease mortgage prices. a. True b. False

Q: An increase in either the risk-free rate or the risk premium on a fixed-rate mortgage results in a higher required rate of return when investing in the mortgage and therefore causes the mortgage price to decrease. a. True b. False

Q: Mortgage lenders normally charge a higher initial interest rate on adjustable-rate mortgages than on fixed-rate mortgages. a. True b. False

Q: Speculators sell credit default swaps to benefit from the default of specific subprime mortgages. a. True b. False

Q: The valuation of mortgage-backed securities is difficult because of limited transparency. a. True b. False

Q: Mortgage companies, commercial banks, and savings institutions are the primary originators of mortgages. a. True b. False

Q: Non-U.S. financial institutions never hold mortgages on U.S. property. a. True b. False

Q: An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages. a. True b. False

Q: The higher the level of equity invested by the borrower, the higher the probability that the loan will default. a. True b. False

Q: Regardless of what happens to market interest rates, most adjustable-rate mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over the mortgage life. a. True b. False

Q: A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal. a. True b. False

Q: Some adjustable-rate mortgages (ARMs) contain an option clause that allows mortgage holders to switch to a fixed-rate mortgage within a specified period. a. True b. False

Q: Indicate whether the statement is true or false. A financial institution may service a mortgage even after selling it.a. Trueb. False

Q: ​Which of the following bonds is most susceptible to interest rate risk from an investor's perspective? a. ​short-term, high-coupon b. ​short-term, low-coupon c. ​long-term, high-coupon d. ​long-term, zero-coupon

Q: Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is a. 1.73 years. b. 1.81 years. c. 1.90 years. d. None of these are correct.

Q: An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____. a. weak; decrease b. strong; increase c. weak; increase d. strong; decrease e. weak; increase AND strong; decrease

Q: The valuation of bonds is generally perceived to be ____ the valuation of equity securities. a. more difficult than b. easier than c. just as difficult as d. None of these are correct.

Q: A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years. a. 1.33 b. 1.27 c. 3.24 d. 1.31 e. None of these are correct.

Q: Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bond will be ____ its par value.​ a. ​above; above b. ​above; below c. ​below; below d. ​below; above

Q: ​Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____. a. ​increase; long-maturity bonds with zero-coupon rates b. ​decrease; short-maturity bonds with high-coupon rates c. ​increase; high-coupon bonds with long maturities d. ​decrease; long-maturity bonds with zero-coupon rates

Q: If interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's credit risk.) a. consistently increase b. consistently decrease c. remain unchanged d. change in a direction that cannot be determined with the above information

Q: ​When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds. a. ​higher; lower b. ​higher; higher c. ​lower; higher d. ​lower; lower

Q: ​The prices of ____-coupon bonds and bonds with ____ maturities are most sensitive to changes in the required rate of return. a. ​low; short b. ​low; long c. ​high; short d. ​high; long

Q: Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes. a. matching b. laddered c. barbell d. interest rate e. None of these are correct.

Q: ​The actual relationship reflecting the response of a bond's price to a change in bond yields is a. ​concave. b. ​convex. c. ​linear. d. ​quadratic.

Q: A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____. a. 1,302 b. 963 c. 761 d. 1,299

Q: Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond? a. $1,000.00 b. $1,147.20 c. $856.80 d. None of these are correct.

Q: ​If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates. a. ​underestimate; underestimate b. ​overestimate; overestimate c. ​underestimate; overestimate d. ​overestimate; underestimate

Q: The value of ____-risk securities will be relatively ____. a. high; high b. high; low c. low; low d. None of these are correct.

Q: ​Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher inflationary expectations lead to _______ interest rates. a. ​higher; lower b. ​higher; higher c. ​lower; higher d. ​lower; lower

Q: The prices of short-term bonds are commonly ____ those of long-term bonds. a. more volatile than b. equally as volatile as c. less volatile than d. More volatile and less volatile occur with about equal frequency.

Q: Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years and a required rate of return of 9 percent. What is the current price? a. $363,212 b. $385,500 c. $422,400 d. $424,100 e. $525,400

Q: ​Which of the following is most likely to cause a decrease in bond prices? a. ​a decrease in money supply growth and an increase in the demand for loanable funds b. ​a forecast of decreasing oil prices c. ​a forecast of a stronger dollar d. ​an increase in money supply growth and no change in the demand for loanable funds

Q: Any announcement that signals stronger than expected economic growth tends to increase bond prices.​ a. True b. False Indicate the answer choice that best completes the statement or answers the question.

Q: An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.​ a. True b. False

Q: ​The market price of a bond is partly determined by the timing of the payments made to bondholders. a. True b. False

Q: A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.​ a. True b. False