GNMA Bonds Which of the following should a bond portfolio manager purchase if the manager is looking…

GNMA Bonds In contrast to original-issue U.S. Treasury securities, original-issue GNMA pass through securities

a. Provide quarterly payments to the investor.

b. Have a limited availability of maturities.

c. Are often issued in zero coupon form.

d. Have interest payments.

GNMA Bonds Which of the following should a bond portfolio manager purchase if the manager is looking for mortgage-backed securities that would perform best during a period of rising interest rates?

a. A 12 percent GNMA with an average life of 5.6 years.

b. An 8 percent GNMA with an average life of 6.0 years.

c. A 10 percent GNMA with an average life of 8.5 years.

d. A 6 percent GNMA with an average life of 9.0 years.

GNMA Bonds Why will the effective yield on a GNMA bond be higher than that of a U.S. Treasury bond…

GNMA Bonds Why will the effective yield on a GNMA bond be higher than that of a U.S. Treasury bond with the same quoted yield to maturity? Because

a. GNMA yields are figured on a 360-day basis.

b. GNMAs carry higher coupons.

c. GNMAs have longer compounding periods.

d. GNMA interest is paid monthly.

Mortgage-Backed Bonds If a mortgage-backed bond is issued as a fully modified pass-through security, it means that

a. Bondholders will receive full and timely payment of principal and interest even if underlying mortgage payments are not made.

b. The bond has been structured to include both conforming and nonconforming loans.

c. The interest rates on the underlying mortgages have been altered so that they equal the weighted-average coupon on the bond.

d. The security carries a balloon payment to ensure that the bond is fully amortized in a set time frame (12 to 15 years).

Prepayments A bond analyst at Omnipotent Bank (OB) notices that the prepayment experience on his…

Prepayments Projecting prepayments for mortgage pass-through securities

a. Requires only a projection of changes in the level of interest rates.

b. Requires analyzing both economic and demographic variables.

c. Is not necessary to determine a cash flow yield.

d. Is not necessary to determine duration.

Prepayments A bond analyst at Omnipotent Bank (OB) notices that the prepayment experience on his holdings of high-coupon GNMA issues has been moving sharply higher. What does this indicate?

a. Interest rates are falling.

b. The loans comprising OB’s pools have been experiencing lower default rates.

c. The pools held by OB are older issues.

d. All of the above.

Mortgage-Backed Bonds Which of the following statements about mortgage pass through securities is…

Mortgage-Backed Bonds Which of the following statements about mortgage pass through securities is (are) correct?

I. Pass-throughs offer better call protection than most corporates and Treasuries.

II. Interest and principal payments are made on a monthly basis.

III. It is common practice to use the weighted-average maturity on a pass-through in place of its duration.

IV. Pass-through are relatively immune from reinvestment risk.

a. I and III only

b. II and III only

c. II only

d. IV only

Mortgage-Backed Bonds Which of the following are advantages of mortgage-backed securities (MBSs)?

Mortgage-Backed Bonds Which of the following are advantages of mortgage-backed securities (MBSs)?

I. MBS yields are above those of similarly rated corporate and U.S. Treasury bonds.

II. MBSs have high-quality ratings, usually AAA, with some backed by the full faith and credit of the U.S. government.

III. MBSs have no call provision, thus protecting the investor from having to make a reinvestment decision before maturity.

a. I and II only

b. II and III only

c. I and III only

d. I, II, and III

Mortgage-Backed Bonds Which of the following are characteristics that would make mortgage-backed…

Mortgage-Backed Bonds Which of the following are characteristics that would make mortgage-backed securities (MBSs) inappropriate for less sophisticated, conservative investors?

I. The maturity of MBSs is quite variable and difficult to determine.

II. Due to their convexity, the realized total return on MBSs is often more dependent on interest rate levels than other bonds of similar maturity.

III. Due to a possible unfamiliarity with prepayment concepts, investors may not be able to evaluate the true yield on MBS issues.

IV. Many MBS issues are not quoted widely and are difficult to monitor.

a. I, II, and III only

b. I, III, and IV only

c. II and IV only

d. I, II, III, and IV

Collateralized Mortgage Obligations For a given mortgage pool, which of the following CMOs based on…

Collateralized Mortgage Obligations For a given mortgage pool, which of the following CMOs based on that pool is the riskiest investment?

a. 100/300 PAC bond

b. A-tranche sequential CMO

c. Interest-only (IO) strip

d. Principal-only (PO) strip

Collateralized Mortgage Obligations For a given mortgage pool, which of the following CMOs based on that pool is most likely to increase in price when market interest rates increase?

a. 100/300 PAC bond

b. A-tranche sequential CMO

c. Interest-only (IO) strip

d. Principal-only (PO) strip

MBS Duration Which of the following most accurately measures interest rate sensitivity for mortgage…

MBS Duration Higher prepayments have what impact on the effective duration of a mortgage pass-through security?

a. Decrease effective duration for all maturity mortgages.

b. Increase effective duration for all maturity mortgages.

c. Increase (decrease) effective duration for short (long) maturity mortgages.

d. Increase (decrease) effective duration for long (short) maturity mortgages.

MBS Duration Which of the following most accurately measures interest rate sensitivity for mortgage pass-through securities with prepayment risk?

a. Static duration

b. Effective duration

c. Modified duration

d. Macaulay duration

CMO Duration Which of the following most accurately measures interest rate sensitivity for…

CMO Duration Which of the following most accurately measures interest rate sensitivity for collateralized mortgage obligations?

a. Static duration

b. Effective duration

c. Modified duration

d. Macaulay duration

MBS Duration The most important difference between effective duration and Macaulay duration for a mortgage pass-through security is that

a. Macaulay duration is easier to calculate.

b. Effective duration is easier to calculate.

c. Macaulay duration accounts for prepayment sensitivity.

d. Effective duration accounts for prepayment sensitivity.

Ginnie, Freddie, and Fannie From an investor’s point of view, what is the difference between…

Mortgage Securitization How does mortgage securitization benefit borrowers?

Mortgage Securitization How does mortgage securitization benefit mortgage originators?

Mortgage Payments All else the same, will the payments be higher on a 15-year mortgage or a 30-year mortgage? Why?

Ginnie, Freddie, and Fannie From an investor’s point of view, what is the difference between mortgage pools backed by GNMA, FNMA, and FHLMC?

Mortgage Pools What does it mean for a mortgage pool to be fully modified?