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Exam 24: Managing Risk Off the Balance Sheet With Loan Sales and Securitization

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Question 31

Multiple Choice

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If a mortgage pass-through experiences smaller prepayments than expected early on in the life of the security,the result will be that pass-through holders will receive _______ than expected cash flows early on and _______ than expected cash flows later on.

A) greater; less
B) greater; greater
C) less; greater
D) less; less
E) less; no different

F) All of the above
G) A) and D)

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Question 32

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A mortgage pass-through security is a bond issue backed by a group of mortgages that pays fixed semiannual coupon payments and the principal is repaid only at maturity.

A) True
B) False

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Question 33

True/False

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Vulture funds specialize in buying distressed loans.

You own a mortgage-backed security and you will receive fixed semiannual interest payments and no principal payments as long as prepayments remain within a given range. If prepayments move outside the range,you will receive prepayments. You must be holding a ______________________.

A three-class sequential pay CMO has an initial principal balance of $50 million per class. In the first month,interest payments of $5 million and principal payments of $2 million are received. In the second month,Class A holders receive interest on _____ principal and Class B holders receive interest on _____ principal.

More than 90 percent of loan sales are via assignments.

A pass-through security is best characterized as

Advantages of loan sales and securitization typically include all but which one of the following?

Why has securitization progressed most rapidly for home mortgages?

Banks were willing to swap LDC loans for Brady bonds because:

The bank keeps a capital-to-asset ratio of 8 percent. If the bank does not securitize the mortgages,they will be fully funded with demand deposits that have a reserve requirement of 10 percent. The demand deposits also have a deposit insurance premium of 0.20 cents per $100 of deposits. If the bank securitizes the mortgages,how much less capital will the bank require? If the savings from not having the required reserves and the deposit insurance premiums could be invested at 5 percent,what is the dollar opportunity cost of not securitizing?

In a loan participation,which of the following is/are true? I. The loan buyer has no part in the original underlying credit agreement,even after purchase of the loan. II. If the selling bank fails,the loan buyer's claim against the selling bank may be treated as unsecured. III. In the event the selling bank fails,the original borrower's deposits may be used to reduce the loan amount without any proceeds going to the loan buyer.

What loans,other than mortgages,are currently being securitized?

The act of buying a share in a loan syndication with limited contractual control and rights over the borrower is called a

A four-class CMO has Class A,Class B,Class C,and the residual Class Z securities outstanding. Which class has the longest duration?

A loan that finances a merger or acquisition that results in a high-leverage ratio for the borrower is called a

The sum of the market values of all the classes of a CMO is greater than the total value of the GNMA pass-throughs backing the CMO because