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1) Securitization is beneficial for banks because it: A

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1) Securitization is beneficial for banks because it:

A. repackages bank loans into simpler structures.

B. increases the funds available for banks to lend.

C. allows banks to maintain ownership of their securitized assets.

 

2. In a securitization, a special purpose entity (SPE) is responsible for the:

A. issuance of the asset-backed securities.

B. collection of payments from the borrowers.

C. recovery of underlying assets for delinquent loans.

 

3. In a securitization, the collateral is initially sold by the:

A. issuer.

B. depositor.

C. underwriter.

 

4. A special purpose entity issues asset-backed securities in the following structure.

Bond Class                                           Par Value (€ millions)

A (senior)                                                       200

B (subordinated)                                            20

C (subordinated)                                                  5

At which of the following amounts of default in par value would Bond Class A experience a loss?

A. €20 million

B. €25 million

C. €26 million

 

5. In a securitization structure, time tranching provides investors with the ability to choose between:

A. extension risk and contraction risk.

B. fully amortizing loans and partially amortizing loans.

C. senior bonds and subordinate bonds.

6. A goal of securitization is to:

A. separate the seller’s collateral from its credit ratings.

B. uphold the absolute priority rule in bankruptcy reorganizations.

C. account for collateral’s primary influence on corporate bond credit spreads.

 

7. The last payment in a partially amortizing residential mortgage loan is best referred to as a:

A. waterfall.

B. principal repayment.

C. balloon payment.

 

8. If a mortgage borrower makes prepayments without penalty to take advantage of falling interest rates, the lender will most likely experience:

A. extension risk.

B. contraction risk.

C. yield maintenance.

 

9. Which of the following characteristics of a residential mortgage loan would best protect the lender from a strategic default by the borrower?

A. Recourse

B. A prepayment option

C. Interest-only payments

 

10. William Marolf obtains a 5 million EUR mortgage loan from Bank Nederlandse. A year later the principal on the loan is 4 million EUR and Marolf defaults on the loan. Bank Nederlandse forecloses, sells the property for 2.5 million EUR, and is entitled to collect the shortfall, 1.5 million EUR, from Marolf. Marolf most likely had a:

A. bullet loan.

B. recourse loan.

C. non-recourse loan.

 

11. Fran Martin obtains a non-recourse mortgage loan for $500,000. One year later, when the outstanding balance of the mortgage is $490,000, Martin cannot make his mortgage payments and defaults on the loan. The lender forecloses on the loan and sells the house for $315,000. What amount is the lender entitled to claim from Martin?

A. $0.

B. $175,000.

C. $185,000.

 

12. Which of the following describes a typical feature of a non-agency residential mortgage-backed security (RMBS)?

A. Senior-subordinate structure in bond classes

B. A pool of conforming mortgages as collateral

C. A guarantee by the appropriate government sponsored enterprise(GSE)

 

13. If interest rates increase, an investor who owns a mortgage pass-through security is most likely affected by:

A. credit risk.

B. extension risk.

C. contraction risk.

 

14. Which of the following is most likely an advantage of collateralized mortgage obligations (CMOs)? CMOs can

A. eliminate prepayment risk.

B. be created directly from a pool of mortgage loans.

C. meet the asset/liability requirements of institutional investors.

 

15. The longest-term tranche of a sequential-pay CMO is most likely to have the lowest:

A. average life.

B. extension risk.

C. contraction risk.

 

16. The tranches in a collateralized mortgage obligation (CMO) that are most likely to provide protection for investors against both extension and contraction risk are:

A. planned amortization class (PAC) tranches.

B. support tranches.

C. sequential-pay tranches.

 

17. In the context of mortgage-backed securities, a conditional prepayment rate (CPR) of 8% means that approximately 8% of an outstanding mortgage pool balance at the beginning of the year will be prepaid:

A. in the current month.

B. by the end of the year.

C. over the life of the mortgages.

 

18. Compared with the weighted average coupon rate of its underlying pool of mortgages, the pass-through rate on a mortgage pass-through security is:

A. lower.

B. the same.

C. higher.

 

19. The single monthly mortality rate (SMM) most likely:

A. increases as extension risk rises.

B. decreases as contraction risk falls.

C. stays fixed over time when the standard prepayment model remains at 100 PSA.

 

20. Credit risk is an important consideration for commercial mortgage-backed securities (CMBS) if the CMBS are backed by mortgage loans that:

A. are non-recourse.

B. have call protection.

C. have prepayment penalty points.

 

21. Which commercial mortgage-backed security (CMBS) characteristic causes CMBS to trade more like a corporate bond than an agency residential mortgage-backed security (RMBS)?

A. Call protection

B. Internal credit enhancement

C. Debt-to-service coverage ratio level

 

22. Which of the following investments is least subject to prepayment risk?

A. Auto loan receivable–backed securities

B. Commercial mortgage-backed securities (CMBS)

C. Non-agency residential mortgage-backed securities (RMBS)

 

23. An excess spread account incorporated into a securitized structure is designed to limit:

A. credit risk.

B. extension risk.

C. contraction risk.

 

24. Which of the following best describes the cash flow that owners of credit card receivable-backed securities receive during the lockout period?

A. Only principal payments collected

B. Only finance charges and fees collected

C. No cash flow is received as all cash flow collected is reinvested.

 

25. The CDO tranche with a credit rating status between senior and subordinated bond classes is called the:

A. equity tranche.

B. residual tranche.

C. mezzanine tranche.

 

26. The key to a CDO’s viability is the creation of a structure with a competitive return for the:

A. senior tranche.

B. mezzanine tranche.

C. subordinated tranche.