1. What distinguishes the mortgage from the other capital market?

 Mortgage market is the market for the sale of securities or bonds collateralized by
the value of mortgage loans. The mortgage lender, commercial banks or specialized firm
will group together many loans and sell grouped loans as securities called collateralized
mortgage obligations (CMO’s). The risk of the individual loans is reduced by that
aggregation process . Whereas, capital markets are financial markets for the buying and
selling of log-term debt or equity- backed securities . These markets channel the
wealth of savers to those who can put it to long-term productive use , such companies
or governments making long-term investments .
2. Most mortgage loans once had balloon payments: now, most current mortgage loans are fully
amortized . What is the difference between a balloon loan and a fully amortizing loan?
 A balloon payment mortgage is a mortgage which does not fully amortize over the term
of the note, thus leaving a balance due at maturity. The final payment is called a balloon
payment because of its large size. A balloon payment mortgages are more common in
commercial real estate than in residential real estate than in residential real estate. It
may have a fixed or floating interest rate . Whereas , a fully amortizing loan is a type of
loan which is completely paid off by the end of its term, given the borrower makes
complete payments based on the loan’s amortization schedule.
3. Give and explain briefly the three important factors that affect the interest rate on the loan.
 Current long-term market rates- long term market rates that are determined by the
supply and demand for long-term funds, which are in turn affected by the number of
global, national, and regional factors.
 Term or Life of the mortgage-generally, long-term mortgages have higher interest rates
than short-term mortgages.
 Number of discount Points Paid- Discount points or points are interest payments made
at the beginning of the loan. In exchange for the points , the lender reduces the interest
rates on the loan.
4. What features contribute to keeping long-term mortgage interest rates low?
 Feature that contribute to keeping long-term mortgage interest rate low is the discount
points which are the interest payment made at the beginning of a loan and exchange
for this points the lenders reduce the interest rate of the loan . In addition ,the credit
score is one factor that can affect the interest rate . In general, consumers with higher
credit scores receive lower interest rates than consumers with lower credit scores.
5. Distinguish between conventional mortgage loan and insured mortgage-loan .
 Conventional mortgages are originated by banks or other mortgage lenders but are not
guaranteed by government controlled entities. Most lenders though now insure many
conventional loans against default or they require the borrower to obtain private
mortgage insurance on loans . Whereas , insured mortgages are originated by banks
and lenders but are guaranteed by either the government or government-controlled
entities.
6. Describe briefly the following mortgage loans:
a. Equity participating mortgage loan-is a type of mortgage which allows the lender to share in
part of income, or resale proceeds, of a property . As such the lender becomes an equity
partner in the purchase , rather than just a mortgage issuer.
 b. Shared-appreciation –mortgage loan- is a mortgage in which the lender agrees to receive
some or all of the repayment in the form of a share of the increase in the value of property.
c. Growing equity mortgage loan-is a loan with a fixed rate with monthly payments that
increase over time . the interest rate on the loan remains the same through out its life-
there is never negative amortization.
d. Graduated –payment mortgage loan often referred to as GPM, is a mortgage with low initial
monthly payments which gradually increase over specified time frame.
e. Fixed-rate mortgage loan or FRM is a fully amortizing mortgage loan where the interest rate
on the note remains the same through the term f the loan , as opposed to loans where the
interest rate may adjust or “float”.
7. Give the largest providers of funds for mortgage loans.
 Mortgage tools and trust(49%)
 Commercial banks(24%)
 Government agencies and others(15%)
 Life insurance companies(9%)
 Savings and Loan associates(9%)
8. What is meant by “ securitization of mortgage” ?
 The process of mortgage securitization involves combining individual mortgages of
similar characteristic in a pool and selling debt securities that draw interest on principal
payments from the pool of mortgages. Securitization turns liquid assets of individual
mortgage loans into marketable securities that can be bought , sold and traded on the
secondary markets.
9. Describe the impact of securitized mortgage on the mortgage market.
 First, securitization has created a more competitive mortgage market and has
encouraged new firms to enter the mortgage origination business. This has lowered
mortgage interest rates and thereby raised consumer demand for housing.Securitized
mortgage are low-risk securities that have higher yield than comparable government
bond and attract funds from around the world.Securitization activities tend to boost
profitability.
10. What is meant by the underlying as it relates to derivative financial instruments?
 There are other financial instruments based solely on the movement of debt and equity.
There are financial instruments that go up when interest go up. There are also financial
instruments that go down when stock prices go down. These financial instruments are
based on the performance of the underlying asset , or the debt and equity that is the
original investment. This class of financial instruments derives its value from
movements in the underlying.
11. What are the main distinction between a traditional financial instruments and derivative
financial instruments?
 Derivative markets are dealt in forward markets and traditional markets are not.
Derivative instruments include stocks, and bonds and other commodities. Traditional
instruments are cash, accounts receivable and notes payable. In addition, traditional
instruments derived their value from fair value while derivative instruments from a
value of the other asset.
12. In what situation will be unrealized holding gain or loss on a non-trading equity investment are
reported in income?
 When non-trading equity investment is holdings less than 20% ,it is presumed that
companies hold the investment to profit from price changes . The accounting and
accounting rule for these investments is to value investment at fair value and record
unrealized gain or losses in net income( the fair value method). Dividends received are
recorded in income. Equity held for purpose other than trading are recorded at fair
value on the statement of financial position , with unrealized gains or losses reported
in other comprehensive income.
13. A
14. A
15. D
16. D