FIN 350 Week 6 Quiz – Strayer
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Quiz
5 Chapter 9 and 10
Chapter
9—Mortgage Markets
1. Mortgage-backed
securities are commonly contained within collateralized debt obligations.
a.
True
b.
False
2. 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 the above
|
3. 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 the above are very common
|
4. 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
|
5. 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.
|
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c.
|
average Treasury bill rate over the previous year.
|
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d.
|
average Treasury bond rate over the previous year.
|
6. 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.
|
7. From
the perspective of the lending financial institution, interest rate risk is
|
a.
|
lower on a 30-year fixed-rate mortgage than on a
15-year fixed-rate mortgage.
|
|
b.
|
lower on a 15-year fixed-rate mortgage than on a
30-year fixed-rate mortgage.
|
|
c.
|
higher on a 15-year fixed-rate mortgage than on a
30-year fixed-rate mortgage.
|
|
d.
|
higher on a 15-year adjustable-rate mortgage than
on a 30-year adjustable-rate mortgage.
|
8. 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.
|
9. 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
|
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c.
|
lower; greater
|
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d.
|
lower; lower
|
10. 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
|
11. 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
12. Use
an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate
of 9 percent. In the first month, the total mortgage payment is $____, and
$____ of this amount represents payment of interest.
|
a.
|
1,014; 264
|
|
b.
|
1,241; 750
|
|
c.
|
1,014; 750
|
|
d.
|
none of the above
|
13. A
mortgage that requires interest payments for a three- to five-year period, then
full payment of principal, is a(n)
|
a.
|
chattel mortgage.
|
|
b.
|
balloon payment mortgage.
|
|
c.
|
variable-rate mortgage.
|
|
d.
|
open-ended mortgage bond.
|
14. In
an amortization schedule of monthly mortgage payments
|
a.
|
the amount of interest in each payment is equal to
the principal paid.
|
|
b.
|
interest payments exceed principal payments early
on.
|
|
c.
|
principal payments exceed interest payments early
on.
|
|
d.
|
B and C both occur with about equal frequency
|
15. 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.
|
16. The
interest rate on a second mortgage is ____ 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
|
17. 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
|
18. 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
|
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c.
|
second mortgage
|
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d.
|
shared-appreciation mortgage
|
19. Mortgage
companies, commercial banks and savings institutions are the primary
originators of mortgages.
a.
True
b.
False
20. ____
was created in 1968 as a corporation that is wholly owned by the federal
government. It guarantees payment on mortgages that meet specific criteria.
|
a.
|
Freddie Mac
|
|
b.
|
Ginnie Mae
|
|
c.
|
Fannie Mae
|
|
d.
|
None of the above
|
21. "Securitization"
refers to the private insurance of conventional mortgages.
a.
True
b.
False
22. A
financial institution may service a mortgage even after selling it.
a.
True
b.
False
23. The
difference between the 30-year mortgages 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.
|
24. Mortgage
prices would normally be expected to ____ when the interest rates ____, holding
other factors constant.
|
a.
|
increase; increase
|
|
b.
|
decrease; decrease
|
|
c.
|
increase; decrease
|
|
d.
|
none of the above
|
25. Collateralized
mortgage obligations (CMOs) are generally perceived to have
|
a.
|
no prepayment risk but some default risk.
|
|
b.
|
no prepayment risk and no default risk.
|
|
c.
|
the same interest rate risk as money market
securities.
|
|
d.
|
a high degree of prepayment risk.
|
26. Mortgage
prices are subject to
|
a.
|
interest rate risk.
|
|
b.
|
credit risk.
|
|
c.
|
prepayment risk.
|
|
d.
|
all of the above.
|
27. During
a weak economy, the credit risk to a financial institution from investing in
mortgage-backed securities representing subprime mortgages is ____ than that of
mortgage-backed securities representing prime mortgages.
|
a.
|
equal to
|
|
b.
|
slightly less than
|
|
c.
|
more than
|
|
d.
|
substantially less than
|
28. ____
are backed by conventional mortgages.
|
a.
|
Ginnie Mae mortgage-backed securities
|
|
b.
|
Federal Reserve mortgage-backed securities
|
|
c.
|
Private-label pass-through securities
|
|
d.
|
Shared appreciation pass-through securities
|
29. Which
of the following is not a guarantor of federally insured mortgages?
|
a.
|
the Federal Housing Administration (FHA)
|
|
b.
|
the Veteran's Administration (VA)
|
|
c.
|
the Federal Deposit Insurance Corporation (FDIC)
|
|
d.
|
all of the above are guarantors of federally
insured mortgages
|
30. ____
economic growth will probably ____ the risk premium on mortgages and ____ the
price of mortgages.
|
a.
|
Strong; increase; decrease
|
|
b.
|
Strong; increase; increase
|
|
c.
|
Weak; decrease; increase
|
|
d.
|
Weak; increase; increase
|
|
e.
|
Weak; decrease; decrease
|
31. A
____ mortgage allows borrowers to initially make small payments on the
mortgage, which are then increased on a graduated basis over the first five to
ten years; payments then level off from there on.
|
a.
|
balloon-payment
|
|
b.
|
graduated-payment
|
|
c.
|
shared-appreciation
|
|
d.
|
growing-equity
|
|
e.
|
none of the above
|
32. The
adjustable-rate mortgage creates uncertainty for the ____ profit margin, but
reduces the uncertainty for the ____.
|
a.
|
originator's; borrower
|
|
b.
|
borrower's; originator
|
|
c.
|
government's; originator
|
|
d.
|
none of the above
|
33. When
financial institutions originate residential mortgages, the mortgage contract
should not specify
|
a.
|
whether the mortgage is federally insured.
|
|
b.
|
the amount of the loan.
|
|
c.
|
whether the interest rate is fixed or adjustable.
|
|
d.
|
the maturity.
|
|
e.
|
the mortgage contract should specify all of the
above
|
34. Which
of the following is not a common type of mortgage-backed security according to
your text?
|
a.
|
participation certificates (PCs)
|
|
b.
|
collateralized mortgage obligations (CMOs)
|
|
c.
|
balloon-payment mortgage certificates
|
|
d.
|
private-label pass-through securities
|
|
e.
|
all of the above are common types of mortgage
pass-through securities
|
35. ____
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
|
36. Mortgage-backed
securities are assigned ratings by:
|
a.
|
rating agencies.
|
|
b.
|
the Treasury.
|
|
c.
|
the Fed.
|
|
d.
|
the mortgage originator.
|
37. In
a collateralized mortgage obligation (CMO), mortgages are segmented into ____ (or classes).
|
a.
|
balloon payments
|
|
b.
|
caps
|
|
c.
|
tranches
|
|
d.
|
strips
|
38. The
credit crisis is mostly attributed to the use of:
|
a.
|
strict criteria applied by mortgage originators.
|
|
b.
|
liberal criteria applied by mortgage originators.
|
|
c.
|
very tough credit ratings applied to mortgages.
|
|
d.
|
fixed-rate mortgages with long terms to maturity.
|
39. 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 mortgages.
|
|
c.
|
invested only in prime mortgages that offered very
low returns.
|
|
d.
|
invested heavily in subprime mortgages.
|
40. ____
mortgages enabled 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
|
41. The
secondary mortgage market that accommodates originators of mortgages who desire
to sell their mortgages before maturity.
a.
True
b.
False
42. 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
43. 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
44. Mortgage
lenders normally charge a higher initial interest rate on adjustable-rate
mortgages than on fixed-rate mortgages.
a.
True
b.
False
45. A
balloon-payment mortgage requires 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
46. During
the early years of a mortgage, most of the monthly payment reflects principal.
a.
True
b.
False
47. Mortgages
are rarely sold in the secondary market.
a.
True
b.
False
48. 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 mortgage prices to decrease.
a.
True
b.
False
49. Strong
economic growth tends to reduce the probability that the issuer of a mortgage
will default on its debt payments and therefore tends to decrease mortgage
prices.
a.
True
b.
False
50. The
higher the level of equity invested by the borrower, the higher the probability
that the loan will default.
a.
True
b.
False
51. Borrowers
who have a lower level of income relative to the periodic loan payments are
more likely to default on their mortgages.
a.
True
b.
False
52. Non-U.S.
financial institutions never hold mortgages on U.S. property.
a.
True
b.
False
53. The
____ market accommodates originators of mortgages that desire to sell their
mortgages prior to maturity.
|
a.
|
primary
|
|
b.
|
secondary
|
|
c.
|
money
|
|
d.
|
none of the above
|
54. 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
|
55. From
the perspective of the lending financial institution, there is a ____ degree of
interest rate risk for ____-maturity mortgages.
|
a.
|
higher; shorter
|
|
b.
|
higher; longer
|
|
c.
|
lower; shorter
|
|
d.
|
lower; higher
|
|
e.
|
Answers B and C are correct.
|
56. During
the early 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.
|
Cannot answer without more information.
|
57. Which
of the following will typically require homeowners to ultimately request a new
mortgage?
|
a.
|
graduated-payment mortgage (GPM)
|
|
b.
|
growing-equity mortgage
|
|
c.
|
balloon-payment mortgage
|
|
d.
|
shared-appreciation mortgage
|
58. Which
of the following is not true with respect to a growing-equity mortgage?
|
a.
|
It is similar to a graduated-payment mortgage.
|
|
b.
|
It allows borrowers to initially make small
payments on the mortgage.
|
|
c.
|
It involves increased payments, on a graduated
basis, over the first five to ten years of the mortgage.
|
|
d.
|
It involves payments that level off after the
first five to ten years of the mortgage.
|
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