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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 MPTBs.
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 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:
The process that a trustee would use in assessing whether the value of a mortgage pool is within the required overcollateralization levels is referred to as:
A) Overcollateralization process
B) Marking to market
C) MBB appraisal
D) Market value assessment
Q:
The practice that is implemented with MBBs to compensate for the likelihood that some borrowers will default or make delayed payments on mortgage loans that make up the pool is:
A) Default compensation
B) Tardy payment compensation
C) Prompt payment actions
D) Overcollateralization
Q:
Which of the following is NOT a risk 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:
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
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 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
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 experience
B) The pool factor technique
C) The PSA prepayment 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) All 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 the 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:
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
Q:
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
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
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
Q:
Which of the following is NOT a major type of mortgage-related security?
A) Mortgage-backed bonds (MBBs)
B) Mortgage pass-through security (MPTs)
C) American depositary receipts (ADRs)
D) Collateralized mortgage obligations (CMOs)
Q:
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.
Q:
The standard PSA prepayment curve assumes prepayments of 0.2% per month for the first 30 months and then 0.5% per month thereafter.
Q:
Generally, prices for zero coupon mortgage-backed bonds are more sensitive to interest rate changes than interest bearing MBBs.
Q:
When a pass-through security investor makes repetitive requests of a mortgagor it is referred to as a nuisance call.
Q:
A mortgage pass-through security represents an undivided ownership interest in a pool of mortgages held by a trustee.
Q:
Marking the mortgage to market is the process of accumulating mortgage pools and marketing them to individual investors as mortgage-backed bonds.
Q:
When market interest rates exceed the coupon rate of a MBB, the price of the bond will be greater than its par value.
Q:
When issuing mortgage-backed bonds, the issuer transfers ownership of the underlying mortgage to the investors/bondholders.
Q:
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.
Q:
Under the HUD Act of 1968, the assets, liabilities, and management of secondary market operations were transferred to a completely private corporation known as "Ginnie Mae" (GNMA).
Q:
An optional delivery commitment, gives Fannie Mae the right (but not the obligation) to purchase mortgage loans from originators.
Q:
One difference between mortgage securities and corporate bonds is that mortgage securities tend to be "overcollateralized."
Q:
The secondary mortgage market enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated.
Q:
In 2008, Fannie Mae was spun off in an initial public offering as a private company.
Q:
An arrangement in which a develop/operator may receive a substantial incentive after initial distributions have been made is referred to as a:
A) Bonus
B) Promote
C) Cumulative distribution
D) Consideration
Q:
Which of the following legal entities will likely be ended once the objectives of the effort have been met?
A) Limited partnership
B) S corp
C) Limited liability corporation
D) Joint venture
Q:
Which form of ownership may be viewed unfavorably for use in real estate investment due to the personal liability associated with this approach?
A) General partnership
B) Limited partnership
C) Sole proprietorship
D) C Corp
Q:
Which of the following is NOT one of the criteria used to determine whether a partnership will be treated as a corporation for tax purposes?
A) Unlimited liability
B) Continuity of life
C) Centralization of management
D) Free transferability of interests
Q:
Which of the following imposes certain ownership and minimum capital requirements to avoid "dummy" corporations acting as sole corporate general partners?
A) Safe harbor rules
B) Caveat rules
C) Blind pool rules
D) Corporate regulations
Q:
Interest and real estate tax incurred during construction of real property improvements must be:
A) Deducted from the resale price of the property
B) Included in the depreciable basis of the property
C) Expensed over the construction period
D) Not be included as value of improvements
Q:
A syndicate that raises capital before identifying any or all of the properties it will eventually own is known as a(n):
A) Safe harbor
B) Accredited investor
C) Caveat
D) Blind pool
Q:
How should interest prepayments (including points) for income-producing real estate be handled for tax purposes?
A) They should be expensed over the first year
B) They should be amortized over a period of no less than 60 months
C) They should be amortized over the life of the loan
D) They should be capitalized and deducted once the loan is paid off
Q:
When one investor receives cash flow to achieve a certain IRR before splitting the remaining cash flow it is referred to as:
A) IRR lookback
B) IRR preference
C) Preferred IRR
D) Adjusted IRR
Q:
Sharing cash flow in a joint venture in proportion to the capital contribution is referred to as:
A) Pari passu
B) Equal sharing
C) Preferred return
D) Equity sharing
Q:
Which of the following does NOT need to occur for a partnership allocation to have substantial economic effect?
A) An adjustment must be made in the partner's capital account
B) Liquidation proceeds must be distributed in accordance with capital accounts
C) Profits and losses must be allocated to different partners in proportion to their equity contribution
D) Following the distribution of sale proceeds, partners must be liable to the partnership to restore any deficit in their capital account
Q:
In a syndication, when cash is distributed from an investor's partnership basis how is the new basis calculated?
A) The cash distribution is added to the investor's capital gain
B) The cash distribution is subtracted from the investor's capital gain
C) The cash distribution is added to the investor's partnership basis
D) The cash distribution is subtracted from the investor's partnership basis
Q:
Tom invested $20,000 in a limited partnership. His share of liabilities from mortgage debt was initially $45,000. The property suffered a loss in income during the first year, of which Tom's share was $5,000. However, in years two through four income allocated from the account equaled a total of $9,000 ($3,000 per year). The allocated reduction in debt at the end of year 4 from amortization of the loan is equal to $1,100. What is the balance of Tom's capital account at the end of year 4?
A) −$9,900
B) $24,000
C) $69,000
D) $70,100
Q:
Tom invested $20,000 in a limited partnership. His share of liabilities from mortgage debt was initially $45,000. The property suffered a loss in income during the first year, of which Tom's share was $5,000. However, in years two through four income allocated from the account equaled a total of $9,000 ($3,000 per year). The allocated reduction in debt at the end of year 4 from amortization of the loan is equal to $1,100. What is Tom's basis in the partnership interest at the end of year 4?
A) $67,900
B) −$9,900
C) $77,900
D) $70,100
Q:
Which of the following BEST defines the term "real estate syndication?"
A) A group of investors who have combined their financial resources with the expertise of a real estate professional to carry out a real estate project
B) An organization that acts as a single legal entity and is held separate from the individual investors
C) An organizational form of real estate ownership in which income and expenses are passed through to individuals
D) A group of investors who have combined their financial resources to provide debt funding for a real estate project
Q:
A partnership agreement provides that, at sale, cash proceeds are distributed first to Mr. Smith in an amount equal to his original investment less any cash distributions previously received, then split 50-50 between Mr. Smith and Ms. Jones. Assume that the cash flows from sale are $1 million. How much would Mr. Smith receive if his initial investment was $400,000 and he previously received $25,000 in distributions?
A) $312,500
B) $375,000
C) $487,500
D) $687,500
Q:
Noncumulative pari passu distribution refers to:
A) The payment of dividends by S-corps
B) A payment received by money partners and operating partners in proportion to their capital investment.
C) Payments distributed when the enterprise has negative cash flows
D) The difference in payments received by partners and the payments received by bondholders
Q:
Which of the following statements is TRUE regarding general partnerships?
A) They usually are suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.
B) They usually are not suggested for groups of individuals that are seeking to form a business entity to invest in real estate because of the unlimited liability of each partner.
C) They protect each of the partners from potential losses associated with the partnership's business activities
D) They have assessed income taxes at a lower rate than corporations
Q:
If a developer does not have sufficient cash flows to provide an investor-partner with a preferred distribution, the requirement to do so carries over to the following year.
Q:
Joint ventures typically involve a large number of individual investors joining together to purchase real estate.
Q:
Deductions for payment to a developer or syndicator for their covenants not to compete with a specific project are never allowed according to IRS rules.
Q:
According to IRS rules, interest and real estate taxes incurred during construction of real property improvements must be included in the depreciable basis of the property.
Q:
Capital accounts are debited for cash contributed to the partnership and credited for cash distributed to the partner.
Q:
A limited partnership limits the general partners' liability to the capital they originally invested.
Q:
When a syndication is offered as a "blind pool" offering, the properties to be purchased are not identified before funds are raised.
Q:
Syndications can take the form of corporations, limited partnership, or other organizational forms.
Q:
C-corps have the advantage of providing a pass-through of income for tax purposes.
Q:
A general partner is personally liable for the debts of the partnership whereas a limited partner has "limited liability" like shareholders in a corporation.
Q:
A disadvantage of a limited partnership is that any tax losses can be allocated to the partners to reduce their personal taxable income.
Q:
An IRR preference will always give the investor a return that is equal to or better than what the return would be with an IRR lookback.
Q:
Since land development projects sometimes run behind schedule due to development problems or slow sales of parcels, lenders generally require which of the following in the initial contract?
A) Subcontractor holdbacks
B) Title extension
C) Extension agreement
D) Release from liability
Q:
If a developer constructs some speculative buildings in hopes of identifying purchasers after completion, this is referred to:
A) Feasibility construction
B) Turnkey basis
C) Build to suit basis
D) Optional construction
Q:
Which of the following is FALSE regarding the release price?
A) It is usually calculated to pay off the loan when the last lot is sold
B) It is usually calculated to pay off the loan before the last lot is sold
C) Increasing the release price usually lowers the lender's risk
D) Increasing the release price is likely to lower the investor's initial cash flow
Q:
Which of the following does NOT contribute to the complication of estimating the amount of interest carry?
A) The loan is taken down in draws and interest is calculated only as funds are drawn down
B) Revenue from each type of site varies
C) The rate of repayment of a loan depends on when the parcels are actually sold
D) Development loan interest rates are usually fixed while market rates fluctuate
Q:
The amount to be paid to the lender from each lot sale is included in the:
A) Release schedule
B) Development agreement
C) Cost breakdowns
D) Subcontracts