Accounting
Anthropology
Archaeology
Art History
Banking
Biology & Life Science
Business
Business Communication
Business Development
Business Ethics
Business Law
Chemistry
Communication
Computer Science
Counseling
Criminal Law
Curriculum & Instruction
Design
Earth Science
Economic
Education
Engineering
Finance
History & Theory
Humanities
Human Resource
International Business
Investments & Securities
Journalism
Law
Management
Marketing
Medicine
Medicine & Health Science
Nursing
Philosophy
Physic
Psychology
Real Estate
Science
Social Science
Sociology
Special Education
Speech
Visual Arts
Real Estate
Q:
An investor pays $63.00 per share for stock in a given REIT. The REIT declares a dividend of $4.00 per share and has an EPS of $2.37. Considering the recovery of capital (ROC), what is the new cost basis of the stock acquired by the investor?
(A) $60.63
(B) $61.37
(C) $63.00
(D) $64.63
Q:
Considering the REIT in the question above, at the very least what dividend payment must it make to maintain its tax exempt status?
(A) $1.90
(B) $2.85
(C) $3.80
(D) $5.70
Q:
A REIT with 100 shares outstanding earns $1,000 in rent and incurs operating expenses of $400. In addition, the REIT owns property with an historic cost of $6,000 and depreciates it over a15 year period using straight-line depreciation. What are the funds from operations per share and the earnings per share for this REIT?
(A) $4 and $3, respectively
(B) $4 and $2, respectively
(C) $6 and $2, respectively
(D) $6 and $3, respectively
Q:
A hybrid REIT is comprised of what primary classifications of REITs?
(A) UPREITs, mortgage
(B) Mortgage, equity, retail
(C) Mortgage, equity
(D) Healthcare, retail, office
Q:
Which of the following is NOT a type of REIT?
(A) Mortgage trust
(B) Equity trust
(C) Hybrid trust
(D) Partnership trust
Q:
Using the information from the question above, what would the net asset value (NAV) of the REIT be?
(a) $60.15
(b) $71.89
(c) $153.85
(d) $160.00
(e) $190.00
Q:
A REIT has an NOI of $15 as share and currently pays a dividend of $10 a share. The dividend is projected to increase by 4percent by next year and continue to increase by 4percent per year thereafter. Assuming that the blended cap rate is 9.75percent and the required rate of return is 10.5percent, what value would the Gordon Dividend Discount Model provide?
(a) $60.15
(b) $71.89
(c) $153.85
(d) $160.00
(e) $190.00
Q:
Which of the following regarding private (unlisted) REITs is TRUE?
(a) Unlisted REITs are less expensive than listed REITs
(b) Unlisted REITs are less liquid than listed REITS
(c) Unlisted REITs are more subject to short-term market price volatility than listed REITS
(d) "List or liquidate" provisions in unlisted REITs make such REITs less risky than listed REITS
Q:
Currently, MOST REITs are:
(a) Equity trusts
(b) Mortgage trusts
(c) Hybrid trusts
(d) Partnership trusts
Q:
Net revenue
$20,000,000 Less: Operating expenses
9,800,000 Depreciation and amortization
4,400,000 Income from operations
5,800,000 Less: Interest expense
1,280,000 Net income
$4,520,000 Consider the financial statements for a REIT, given above. Price multiples for comparable REITs are about 10 times current funds from operation (FFO). What price does this suggest for the REIT's shares if 1,000,000 shares are issued?
(a) $4.52 per share
(b) $45.20 per share
(c) $8.92 per share
(d) $89.20 per share
Q:
REITs must be passive investments with external advisors.
Q:
Real estate assets, cash, and government securities represent at least 75% of REIT assets.
Q:
A portion of a REIT's dividend may be a non-taxable return of capital.
Q:
A REIT must have at least 200 shareholders.
Q:
Because REITs are corporations, they are subject to double taxation.
Q:
REITs can sometimes capitalize rather than lease certain expenditures to increase FFO.
Q:
Usually ground leases are for relatively short periods of time.
Q:
REITs are required to pay out 90 percent of their earnings as dividends.
Q:
Mortgage REITs use debt financing to increase their capital bases.
Q:
The U.S. is the only country that allows REITs (or similar investments).
Q:
A mortgage REIT is a REIT that primarily invests in mortgages rather than equity ownership.
Q:
Funds from operation (FFO), is calculated by adding back depreciation and amortization and other non-cash deductions to earnings.
Q:
At least 95 percent of the value of a REIT's assets must consist of real estate assets, cash, and government securities.
Q:
Which of the following does NOT increase the noncredit risks of CDOs?
(A) Collateral management risk
(B) Certainty in average life of CDO tranches
(C) Higher correlation and liquidity
(D) None of the above
Q:
Convexity is a gage for which of the following?
(A) Profitability
(B) Return
(C) Sensitivity
(D) Duration
Q:
Which of the following is FALSE regarding a planned amortization class (PAC) tranche?
(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 scenarios
Q:
The total interest collected from the pool is ______ if prepayment accelerates; therefore, the dollar spread between interest inflow and outflow becomes ______.
(A) Lower, smaller
(B) Lower, wider
(C) Higher, smaller
(D) Higher, wider
Q:
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:
(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 investors
Q:
The residual position in the CMO offering is considered which kind of position?
(A) Primary
(B) Equity
(C) Interest
(D) Debt
Q:
Duration, as referred to in this chapter, is defined as:
(A) A measure of the extent to which different investments expose an investor to interest rate risk
(B) A measure of the weighted-average time required before all principal and interest is received on an investment
(C) A measure that takes into account both the size of cash flows and the timing of their receipt
(D) All of the above
Q:
REMICs were created in order to avoid taxes:
(A) Entirely
(B) At the investor level
(C) At the entity level
(D) No taxes can be avoided.
Q:
Which of the following is NOT characteristic of commercial-backed mortgage securities?
(A) The underlying mortgage pool represents a variety of different property types (retail, multifamily, etc.) and a specific geographical area
(B) The underlying mortgages have usually been outstanding for several years
(C) One of the primary issuers of such securities are insurance companies
(D) In general, the underlying mortgage pool for such securities contain fewer mortgages than are included in residential-backed mortgage pools
Q:
Which of the following investments in NOT a debt obligation of the issuer?
(A) CMOs
(B) MBBs
(C) MPTs
(D) MPTBs
Q:
For which of the following investments does the issuer bear prepayment risk?
(A) CMOs
(B) MBBs
(C) MPTs
(D) MPTBs
Q:
For which of the following investments is the date of maturity known?
(A) CMOs
(B) MBBs
(C) MPTs
(D) MPTBs
Q:
Which of the following is NOT a CMO security type?
(A) A repeat floater
(B) A Z tranche
(C) An inverse floater
(D) An IO tranche
Q:
In comparison to the mortgage securities we have previously discussed, the unique characteristic of CMOs is that:
(A) CMO issuers retain ownership of the underlying mortgage pool
(B) CMOs are issued in multiple security classes
(C) The CMO mortgage pool is not overcollateralized
(D) CMOs are a pay-through in which all amortization and prepayments flow through to investors
Q:
The credit rating of an MPTB depends largely on the:
(A) Amount of overcollateralization
(B) Degree to which government-related securities constitute the excess collateral
(C) Riskiness of the mortgage in the underlying pools
(D) All of the above
Q:
Which of the following statements regarding mortgage pass-through bonds (MPTBs) is FALSE?
(A) MPTBs can be viewed as mortgage-backed bonds with the pass-through of principal and prepayment features of a mortgage pass-through security
(B) Most MPTBs are based on residential mortgage pools and are generally overcollateralized
(C) MPTBs represent an undivided equity ownership interest in a mortgage pool
(D) All of the above are false.
Q:
The main purpose of the Term Asset-Backed Securities Loan Facility (TALF) is to:
(a) Buy mortgage backed securities owned by Freddie Mac, Fannie Mae, and Ginnie Mae
(b) Issue CDOs and use the proceeds to fund infrastructure projects to stimulate the economy
(c) Regulate hedge funds to reduce investments in risky assets
(d) Use residential loans as collateral to purchase U.S. Treasuries as a way to reduce interest rates
Q:
Which of the following statements regarding subprime mortgages is TRUE?
(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) Because of diversification, securities backed by subprime loans and no more risky than those back by prime loans
Q:
Tranche
Principal
Coupon Rate A
$40,000,000
9.25% B
30,000,000
10.00% Z
30,000,000
11.00% A mortgage company is issuing a CMO with three tranches, with the principal and coupon rate given in the table above. What will be the weighted average coupon on the CMO when issued?
(a) 9.25%
(b) 10.00%
(c) 10.08%
(d) 11.00%
Q:
What is the primary distinction between mortgage-related securities backed by residential mortgages and those backed by commercial mortgages?
(a) Default is the key risk with residential mortgages; prepayment is the key risk with commercial mortgages
(b) Interest rate risk is the key risk with residential mortgages; prepayment is the key risk with commercial mortgages
(c) Prepayment is the key risk with residential mortgages; default is the key risk with commercial mortgages
(d) Prepayment is the key risk with residential mortgages; interest rate risk is the key risk with commercial mortgages
(e) There are no significant distinctions
Q:
In CDOs both equity and debt holder prefer riskier, higher-yielding collateral to collect excess spreads.
Q:
CDO managers raises capital through the issuance of rated CDO debt and equity to purchase an undiversified pool of credit instruments.
Q:
CDOs often include "B" notes, mezzanine debt and preferred equity as investments.
Q:
In CMO terminology, planned amortization classes (PACs) are also known as companion tranches.
Q:
CMO investors only pay taxes on interest income.
Q:
Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs.
Q:
From the issuer's perspective, the use of MBBs and MPTBs should be viewed as a method of debt financing.
Q:
If a premium is paid on a CMO issue (at the time of issue), yields will increase as prepayment rates accelerate.
Q:
A CMO does not completely eliminate prepayment risk.
Q:
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.
Q:
The CMO investor assumes the prepayment risk of the underlying mortgages, although the CMO modifies how the risk is allocated.
Q:
The issuer of a mortgage pass-through bond bears all of the prepayment risk of the underlying mortgages.
Q:
A floater is a CMO tranche that has a variable interest rate.
Q:
Investors retain prepayment risk on MBBs, but issuers incur this risk with MPTs.
Q:
A derivative security derives its value from another security, index, or financial claim.
Q:
The CMO is a considered a marketing innovation as well as a financial innovation, because the different it is the first security in the secondary mortgage market to have run a prime-time television ad.
Q:
One way in which a mortgage pay-through bond (MPTB) is similar to a mortgage-backed bond (MBB) is that the pay-through bond is a debt obligation of the issuer.
Q:
Which of the following is NOT a risk listed for mortgage-backed securities?
(A) Default risk
(B) Delayed payment risk
(C) Pass-through risk
(D) Interest rate risk
Q:
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
Q:
Which of the following is FALSE regarding mortgage-backed bonds (MBBs):
(A) Their issuer retains ownership of mortgages
(B) Their maturity is indefinite at issuance
(C) They are issued with fixed coupon rates
(D) They are usually underwritten by investment banking companies
Q:
The primary purpose of Freddie Mac (FHLMC) is to:
(A) Provide a secondary market for mortgage originators
(B) Provide investors with a guaranteed rate of return
(C) Create competition for Fannie Mae and Ginnie Mae
(D) Provide consumers with more options when deciding on a mortgage loan
Q:
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
Q:
Ceteris paribus, 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
Q:
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
Q:
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
Q:
Compared to mortgage pass-though securities (MPTs), MBBs should be priced to provide:
(A) Lower yields, because of lower prepayment risk
(B) Higher yields, because of higher prepayment risks
(C) The same yields, because of equivalent amounts of prepayment risk
(D) None of the above
Q:
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
Q:
When pricing mortgage pass-through securities, issuers use each of the following methods to include prepayment assumptions EXCEPT:
(A) FHA prepayment experiences
(B) The pool factor technique
(C) The PSA model
(D) Constant rates of prepayment
Q:
When evaluating an investment in a mortgage pass-through security, which of the following is NOT one of the characteristics of the underlying mortgage pool that should be considered?
(A) The amount of overcollateralization of the mortgage pool
(B) The geographic distribution of the mortgages
(C) The amount of seasoned mortgages included in the pool
(D) None of the above should be considered.
Q:
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 mortgage will be sufficient to pay the interest on bonds and the principal upon maturity
(D) All of the above
Q:
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
Q:
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
Q:
A 10-year maturity mortgage-backed bond is issued. The bond is a zero coupon bond that promises to pay $10,000 (par) after 10 years. At issue, bond market investors require a 15 percent interest rate on the bond. What is the initial price on the bond?
(a) $2,252
(b) $2,472
(c) $8,696
(d) $10,000
Q:
Using the same information as the question above, 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) $6,835
(b) $6,863
(c) $7,653
(d) $14,270
Q:
A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8percent 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) $6,835
(c) $6,863
(d) $14,270
Q:
A falling rate of market interest would have which of the following impacts on a mortgage pass-through security?
(a) Increase prepayments on loans in the pool
(b) Decrease prepayments on loans in the pool
(c) Decrease the market value of the MPT
(d) Both A and C
(e) Both B and C
Q:
A rising rate of market interest would have which of the following impacts on a mortgage pass-through security?
(a) Increase the market value of the MPT
(b) Decrease the market value of the MPT
(c) Increase or decrease, depending on whether the MPT was issued at a premium or a discount
(d) The market rate of interest has no impact on the market value of a MPT