Ch-13 ) 1. What is mortgage?

A mortgage is a pledge of property to secure payment of a debt. If a homeowner fails in pay the lender
the lender has die right to foreclose the loan and size the property in order to ensure that it is repaid.
2. What are the sources of revenue arising from mortgage origination?
Mortgage servicers include bank related entities, thrift-related entities, and mortgage bankers. There
are five sources of revenue from mortgage servicing.
The First source, the servicing fee is the primary source of revenue. This fee is a fixed percentage of
the outstanding mortgage balance and declines over time as the mortgage balance amortizes.
The Second source of servicing income arises from the interest that can be earned by the servicer
from the escrow balance that the borrower often maintains with the servicer.
The Third source of revenue is the float earned on the monthly mortgage payment. Forth, there are
several sources of ancillary income such as: (i) a late fee charged by the servicer if the payment is not
made on time, (ii) commissions received from cross-selling their borrowers’ credit life and other
insurance products. Fifth, there are other benefits of servicing rights for servicers who are also
lenders.
3. The difference between residential mortgage loan and commercial mortgage.
Commercial Mortgage Residential Mortgage
Commercial mortgage is income producing factor Residential mortgage is non income producing factor
Commercial mortgage is nonrecourse loan Residential mortgage is recourse loan.
Commercial mortgage apartment building, Residential mortgage thrifts, banks,
Ch-8) 4. Define interest rate risk with example.
Interest rate risk: Risk of bonds is the change in market interest rate. An investor faces variations in
his returns due to changes in the market interest rate during his holding period. The interest rate risk is
composed of two risks: Price risk, Reinvestment risk,
1. Price Risk: The risk that the price of the bond will be lower than currently expected at the end of
the investment horizon is called price risk. Features: It is greater risk, The bonds maturity is longer.
2. Reinvestment Risk: It is uncertainity about the rate at which the proceeds from a bond that matures
prior to the maturity date can be reinvested until the maturity date.
Features: Investment horizon is unknown, Rate is unknown at which the proceeds can be reinvested.
5.What is Yield curve? Write down the various yield curves.?
Yield Curve: The yield curve is the relation between the interest rate or cost of borrowing and the
time to maturity of the debt for a given borrower in a given currency.
- The yield curve plots curve plots the yields on financial instruments against the time until
maturity.
- Investor often uses the yield curve to predict the future of short term interest rates.,- In
upward sloping yield means that short term interest will be higher than the short term interest
rate.
Types of yield curve: There are several types of yield curve that are discussed in the following
manner-
i) Nominal Yield Curve: Nominal yield curve refers that yield rise as maturity lengthens. There slop
of yield curve is positive.
ii) Steep Yield Curve: Steep yield curve is a curve which reflects the higher yield of long term bonds
than the yield of short term bonds.
iii) Flat or Humped Yield Curve: A flat yield curve is observed when all maturities have similar
yields.
iv) invested yield curve: An invested yield curve is occurs when long term yields fall below short term yields.
6.Explain Fisher’s Classical Approach?
Irving Fisher analyzed the determination of the interest rate in an economy by inquiring why people save that is,
why they do not consume all their resources and why others below.
7.What are the factors influence the decisions on savings and borrowing of an individual?
Saving is the choice between current and future consumption of goods and services. Individuals save some of
their current income in order to be able to consume more in the future.
There are three factors of saving:
1. Marginal rate of time preference., 2. Income, 3. Reward for saving
1. Marginal rate of time preference: Marginal rate of time preference is the willingness to trade some
consumption now for more future consumption.
2. Income: Another factor of savings decision is income. Higher current income means person will save more.
3. Reward for Saving: The third variable or factor of savings is the reward for savings. It is the rate of interest on
loans that servers make with their consumed income .
8.How does a change in the money supply affect that rate?
A change in the money supply has three different effects upon the level of the interest rate.
1. The liquidity effect: This effect represents the initial of the interest rate to a change in the money supply. – If
money supply increases than initial reaction should be fall in the rate, - Rise in the money supply represents a
shift in the supply curve to the rightward. (Pic)
2. Income Effect: The changes in money supply affect the economy. Money supply means the economically
expansionary. – An increase in money supply raises income,- Much demand is a function of income (Pic)
3. Price expectation effect: Price expectation effect usually occurs only if the money supply grows in a time of high output.
-An increase in the money supply occurs the increase in income depends substantially on the amount of slack in
the economy.,- Increasing money supply will largely stimulate expectation of a rising level of prices for goods& services.
9.Assume there is a sudden expectation of lower interest rates in the future. What would be the
effect on the slope of the yield curve? Explain.
Interest rate expectations affect the yield curve. There are two interest rates: Higher and lower.
Interest rate expectations affect the yield curve. There are two interest rates: Higher and lower.
Impact of sudden expectation of lower interest rates: (pic)
When interest rate decrease; -supply of funds provided by investors increase in long term markets and
decrease in short term securities.-Demand for funds by borrowers increase in short term markets and
decrease in long term markets. –The yield curve becomes downward sloping.
CH-6 Define Pension Plans?
A pension plan is a fund that is established for eventual payment of retirement benefits. A pension
plan is designed to generate regular income for individuals one they retire.
Define Pension Plan sponsors?
Plan sponsors is the entities that establish pension plan including private business entities acting for
their employees; state and local entities operating on behalf of their employees; Pension plan sponsors
may be-
> Corporate or private sponsored plans: Private business entities acting for their employees;
> Public sponsored Plans: Federal, state, and local entities on behalf of their employees;
>Taft Hartley sponsored Plans: Unions on behalf of their members;
> Individual sponsored plans: Individuals for themselves.
Discuss the role of the sponsor of a pension plan?
The roles of the sponsor of a pension plan are as follows:
> Manage pension plan: Plan sponsors may directly manage the pensions, but most allow third-party to handle
them.
> Determining eligibility of employees: Plan sponsors must determine which employees are eligible
for the plan, and most contribute matching funds to each employee’s pension, up to a certain point;
>Designing benchmarks: Plan sponsors design benchmarks against which the fund’s money managers will be measured.
>Measuring and monitoring: Plan sponsors measure and monitor the performance of the fund’s money
managers.
What is the function of the Pension Benefit Guaranty Corporation (PBGC)?
There are some functions that are performing by the Pension Benefit Guaranty Corporation (PBGC) which are follows:
> The PBGC insures vested benefits under defined benefits plan in the event of corporate failures.
> Currently, the PBGC itself is close to insolvency due to fact that many corporate plans are under-
funded and PBGC itself has little enforcement power.
> Many companies have dropped defined benefits plans in favor of defined contribution plans to save
themselves premium and pass on the risks of providing adequate retirement income to the employee
themselves.
Difference between defined benefit plans and defined contribution plans?
Defined benefit plans Defined Contribution plans
The plan sponsor guarantees the retirement
benefits.
The plan sponsor establishing a defined benefit But here the plan sponsor does not purchase an
plan made into the fund to purchase an annuity annuity policy.
policy from a life insurance company.
The plan sponsor makes the investment choices. The employee selects the investment options.