Terms in this set (42)

In an amortization schedule of monthly mortgage payments

a. the amount of interest in each payment is equal to the principal paid.
b. interest payments exceed principal payments early on.
c. principal payments exceed interest payments early on.
d. B and C both occur with about equal frequency
interest payments exceed principal payments early on.
Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed to ____
risk, because they commonly use funds obtained from short-term customer deposits to make
long-term mortgage loans.
a. interest rate
b. exchange rate
c. reinvestment rate
d. prepayment
e. exchange rate
interest rate
During a weak economy, the credit risk to a financial institution from investing in mortgage-
backed securities representing subprime mortgages is ____ than that of mortgage-backed
securities representing prime mortgages.
a. equal to
b. slightly less than
c. substantially less than
d. more than
more than
The probability that a borrower will default (credit risk) is influenced by all of the following,
except
a. economic conditions.
b. the level of equity invested by the borrower.
c. the borrower's income level.
d. the borrower's credit history.
e. Credit risk is affected by all of the above.
credit risk is affected by all of the above
Mortgage-backed securities are assigned ratings by:
a. the Treasury.
b. the mortgage originator.
c. rating agencies.
d. the Fed.
rating agencies
The ____ market accommodates originators of mortgages that desire to sell their mortgages
prior to maturity.
a. primary
b. secondary
c. money
d. none of the above
secondary
During the early years of a mortgage,
a. most of the monthly payment reflects principal reduction.
b. most of the monthly payment reflects interest.
c. about half of the monthly payment reflects interest.
d. Cannot answer without more information.
most of the monthly payment reflects interest
Federally insured mortgages guarantee:
A) loan repayment to the lending financial institution.
B) that the interest rate will not increase during the life of the mortgage.
C) the lending financial institution a selling price for the mortgage in the secondary market.
D) all of these.
loan repayment to the lending financial institution
At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically
_______ the initial interest rate offered on a new adjustable-rate mortgage.
A) below
B) above
C) equal to
D) none of these
above
An institution that originates and holds a fixed-rate mortgage is adversely affected by _______
interest rates; the borrower who was provided the mortgage is adversely affected by _______
interest rates.
A) stable; decreasing
B) increasing; stable
C) increasing; decreasing
D) decreasing; increasing
increasing; decreasing
Rates for adjustable-rate mortgages are commonly tied to the:
A) average prime rate over the previous year.
B) Fed's discount rate over the previous year.
C) average Treasury bill rate over the previous year.
D) average Treasury bond rate over the previous year.
average treasury bill rate over the previous year
Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically
_______ percent per year and _______ percent for the mortgage lifetime.
A) 2; 5
B) 5; 15
C) 0; 10
D) 3; 8
2; 5
From the perspective of the lending financial institution, interest rate risk is:
A) lower on a 30-year fixed-rate mortgage than on a 15-year fixed-rate mortgage.
B) lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
C) higher on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage.
D) higher on a 15-year adjustable-rate mortgage than on a 30-year adjustable-rate mortgage.
lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage
Mortgage companies specialize in:
A) purchasing mortgages originated by other financial institutions.
B) investing and maintaining mortgages that they create.
C) originating mortgages and selling those mortgages.
D) borrowing money through the creation of mortgages that is used to invest in real estate.
originating mortgages and selling those mortgages
For any given interest rate, the shorter the life of the mortgage, the _______ the monthly
payment and the _______ the total payments over the life of the mortgage.
A) greater; greater
B) greater; less
C) less; greater
D) less; less
greater; less
A financial institution has a higher degree of interest rate risk on a _______ than a _______.
A) 30-year fixed-rate mortgage; 15-year fixed-rate mortgage
B) 30-year variable-rate mortgage; 30-year fixed-rate mortgage
C) 15-year fixed-rate mortgage; 30-year fixed-rate mortgage
D) 15-year variable-rate mortgage; 15-year fixed-rate mortgage
30-year fixed-rate mortgage; 15-year fixed-rate mortgage
Use an amortization schedule.) A 15-year, $100,000 mortgage has a fixed mortgage rate of 9
percent. In the first month, the total mortgage payment is $_______, and $_______ of this
amount represents payment of interest.
A) 1,014; 264
B) 1,241; 750
C) 1,014; 750
D) none of these
1,014; 750
11. A mortgage which requires interest payments for a three- to five-year period, then full
payment of principal, is a(n):
A) chattel mortgage.
B) balloon payment mortgage.
C) variable-rate mortgage.
D) open-ended mortgage bond.
balloon payment mortgage
In an amortization schedule of monthly mortgage payments,:
A) the amount of interest in each payment is equal to the principal paid.
B) interest payments exceed principal payments early on.
C) principal payments exceed interest payments early on.
D) none of these.
interest payments exceed principal payments early on
A mortgage with low initial payments that increase over time without ever leveling off is a
_______ mortgage.
A) graduated payment
B) growing-equity
C) second
D) shared-appreciation
growing-equity
The interest rate on a second mortgage is _______ a first mortgage created at the same time,
because the second mortgage is _______ the existing first mortgage in priority claim against the
property in the event of default.
A) higher than; behind
B) equal to; equal to
C) lower than; ahead of
D) higher than; ahead of
E) lower than; behind
higher than; behind
Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-
market interest rate throughout the life of the mortgage?
A) second mortgage
B) growing-equity mortgage
C) graduated payment mortgage
D) shared-appreciation mortgage
shared-appreciation mortgage
A _______ mortgage allows the borrower to initially make small payments on the mortgage. The
payments then increase over the first 5 to 10 years and then level off.
A) graduated payment
B) growing-equity
C) second
D) shared-appreciation
graduated payment
_______ was created in 1968 as a corporation that is wholly owned by the federal government.
It supplies funds to low- and moderate-income homeowners indirectly by facilitating the flow of
funds into secondary mortgage markets.
A) Freddie Mac
B) Ginnie Mae
C) Fannie Mae
D) None of these
ginnie mae
18. A financial institution that prefers to invest in mortgages for long periods of time or to
generate fee income would likely:
A) invest in mortgages.
B) sell mortgages it originated.
C) originate mortgages.
D) do none of these.
originate mortgages
The difference between the 30-year mortgage rate and the 30-year Treasury bond rate is
primarily attributable to _______ risk.
A) interest rate
B) reinvestment rate
C) credit
D) insurance
credit
Mortgage prices would normally be expected to _______ when the budget deficit _______,
holding other factors constant.
A) increase; increases
B) decrease; decreases
C) increase; decreases
D) none of these
increase; decreases
Collateralized mortgage obligations (CMOs) are generally perceived to have:
A) no interest rate risk but some default risk.
B) the same interest rate risk and no default risk.
C) the same interest rate risk as money market securities.
D) a high degree of interest rate risk.
a high degree of interest rate risk
The issuance of pass-through securities by financial institutions that provide mortgages:
A) can reduce their interest rate risk.
B) increases their interest rate risk.
C) has no effect on their interest rate risk.
D) requires financial institutions to sell mortgages outright in the secondary market.
can reduce their interest rate risk
The interest rate received by purchasers of the mortgage pass-through securities is _______
the interest rate on the mortgages serving as collateral.
A) equal to
B) slightly less than
C) much more than
D) substantially less than
slightly less than
Which pass-through security is backed by mortgages that are insured through private insurance
companies?
A) Ginnie Mae mortgage-backed securities
B) Fannie Mae mortgage-backed securities
C) publicly issued pass-through securities (PIPs)
D) shared appreciation pass-through securities
publicly issued pass-through securities (PIPs)
Which of the following is not a guarantor of federally insured mortgages?
A) the Federal Housing Administration (FHA)
B) the Veterans Administration (VA)
C) the U.S. Treasury
D) All of these are guarantors of federally insured mortgages.
the U.S. Treasury
26. _______ economic growth will probably _______ the risk premium on mortgages and
_______ the price of mortgages.
A) Strong; increase; decrease
B) Strong; increase; increase
C) Weak; decrease; increase
D) Weak; increase; increase
E) Weak; decrease; decrease
weak; decrease; increase
_______ mortgage allows borrowers to initially make small payments on the mortgage, which
are then increased on a graduated basis over the first five to ten years; payments then level off
from there on.
A) balloon-payment
B) graduated-payment
C) shared-appreciation
D) growing-equity
E) none of these
graduated-payment
The adjustable-rate mortgage creates uncertainty for the _______ profit margin, but reduces the
uncertainty for the _______.
A) originator's; borrower
B) borrower's; originator
C) government's; originator
D) none of these
borrower's; originator
When financial institutions originate residential mortgages, the mortgage contract should
probably not specify:
A) whether the mortgage is federally insured.
B) the amount of the loan.
C) whether the interest rate is fixed or adjustable.
D) the maturity.
E) The mortgage contract should specify all of these.
the mortgage contract should specify all of these
Which of the following is not a common type of mortgage pass-through securities according to
the text?
A) participation certificates (PCs)
B) collateralized mortgage obligations (CMOs)
C) balloon-payment mortgage
D) publicly issued pass-through securities (PIPs)
E) All of these are common types of mortgage pass-through securities.
balloon-payment mortgage
31. _______ risk is the risk that a borrower may prepay the mortgage in response to a decline in
interest rates.
A) Interest rate
B) Credit
C) Prepayment
D) Reinvestment rate
prepayment
The majority of mortgage debt is on one- to four-family properties.
A) true
B) false
true
A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end
of which the borrower must pay the full amount of the principal.
A) true
B) false
false
Commercial banks and savings institutions are the primary originators of mortgages.
A) true
B) false
true
"Securitization" refers to the private insurance of conventional mortgages.
A) true
B) false
false

1. Mortgage backed securities are commonly contained within collateralized debt

obligations.
true
2. Federally insured mortgages guarantee
loan repayment to the lending financial institution
3. At a given point in time, the interest rate offered on a new fixedrate mortgage is
typically ____ the initial interest rate offered on a new adjustablerate mortgage.
above
4. An institution that originates and holds a fixedrate mortgage is adversely affected by
____ interest rates; the borrower who was provided the mortgage is adversely affected
by ____ interest rates.
increasing; decreasing
5. Rates for adjustablerate mortgages are commonly tied to the
average treasury bill rate over the previous year
6. Caps on mortgage rate fluctuations with adjustablerate mortgages (ARMs) are
typically
2 percent per year and 5 percent for the mortgage lifetime
7. From the perspective of the lending financial institution, interest rate risk is
lower on a 15-year fixed-rate mortgage than on a 30 year fixed-rate mortgage
8. Mortgage companies specialize in
originating mortgages and selling those mortgages
9. For any given interest rate, the shorter the life of the mortgage, the ____ the monthly
payment and the ____ the total payments over the life of the mortgage.
greater; lower
10. A financial institution has a higher degree of interest rate risk on a ____ than a
____.
30-year fixed-rate mortgage; 15- year fixed-rate mortgage
11. A balloonpayment mortgage requires interest payments for a 10 to 20year period, at
the end of which the borrower must pay the full amount of the principal.
false
12. Use an amortization schedule. A 15year $100,000 mortgage has a fixed mortgage
rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of
this amount represents payment of interest.
1,014; 750
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13. A mortgage that requires interest payments for a three to fiveyear period, then full
payment of principal, is a(n)
balloon payment mortgage
14. In an amortization schedule of monthly mortgage payments
interest payments exceeds principal payments early on
15. A mortgage with low initial payments that increase over time without ever leveling off
is a
growing- equity mortgage
16. The interest rate on a second mortgage is ____ on a first mortgage created at the
same time, because the second mortgage is ____ the existing first mortgage in priority
claim against the property in the event of default.
higher than; behind
17. Which of the following mortgages allows the home purchaser to obtain a mortgage
at a below market interest rate throughout the life of the mortgage?
shared-appreciation mortgage
18. A ____ mortgage allows the borrower to initially make small payments on the
mortgage. The payments then increase over the first 5 to 10 years and then level off.
graduated payment mortgage
19. Mortgage companies, commercial banks and savings institutions are the primary
originators of mortgages.
true
20. ____ was created in 1968 as a corporation that is wholly owned by the federal
government. It guarantees payment on mortgages that meet specific criteria.
Ginnie Mae
21. "Securitization" refers to the private insurance of conventional mortgages.
false
22. A financial institution may service a mortgage even after selling it.
true
23. The difference between the 30year mortgages rate and the 30year Treasury bond
rate is primarily attributable to
credit risk
24. Mortgage prices would normally be expected to ____ when the interest rates ____,
holding other factors constant.
increase; decrease
25. Collateralized mortgage obligations (CMOs) are generally perceived to have
a high degree of prepayment risk
26. Mortgage prices are subject to
interest rate risk, credit risk, and prepayment risk
27. During a weak economy, the credit risk to a financial institution from investing in
mortgage backed securities representing subprime mortgages is ____ than that of
mortgage backed securities representing prime mortgages.
more than
28. ____ are backed by conventional mortgages.
private-label pass-through securities
29. Which of the following is not a guarantor of federally insured mortgages?
the Federal Deposit Insurance Corporation (FDIC)
30. ____ economic growth will probably ____ the risk premium on mortgages and ____
the price of mortgages.
weak; decrease; increase
31. A ____ mortgage allows borrowers to initially make small payments on the
mortgage, which are then increased on a graduated basis over the first five to ten years;
payments then level off from there on.
graduated payment
32. The adjustable rate mortgage creates uncertainty for the ____ profit margin, but
reduces the uncertainty for the ____.
borrowers; originator
33. When financial institutions originate residential mortgages, the mortgage contract
should not specify
the mortgage contract should specify all of the above
34. Which of the following is not a common type of mortgagebacked security according
to your text?
balloon payment mortgage certificates
35. ____ risk is the risk that a borrower may prepay the mortgage in response to a
decline in interest rates.
prepayment
36. Mortgage backed securities are assigned ratings by:
rating agencies
37. In a collateralized mortgage obligation (CMO), mortgages are segmented into ____
(or classes).
tranches
38. The credit crisis is mostly attributed to the use of:
liberal criteria applied by mortgage originators
39. Fannie Mae and Freddie Mac experienced financial problems during the credit crisis
because they:
invested heavily in subprime mortgages
40. ____ mortgages enabled more people with relatively lower income, or high existing
debt, or a small down payment to purchase homes.
subprime
41. The secondary mortgage market that accommodates originators of mortgages who
desire to sell their mortgages before maturity.
true
42. Regardless of what happens to market interest rates, most adjustablerate
mortgages (ARMs) specify a maximum allowable fluctuation in the mortgage rate per
year and over the mortgage life.
true
43. Some adjustablerate mortgages (ARMs) contain an option clause that allows
mortgage holders to switch to a fixedrate mortgage within a specified period.
true
44. Mortgage lenders normally charge a higher initial interest rate on adjustable rate
mortgages than on fixedrate mortgages.
false
45. A balloonpayment mortgage requires interest payments for a three to fiveyear
period. At the end of this period, full payment of the principal (the balloon payment) is
required.
true
46. During the early years of a mortgage, most of the monthly payment reflects
principal.
false
47. Mortgages are rarely sold in the secondary market.
false
48. An increase in either the riskfree rate or the risk premium on a fixedrate mortgage
results in a higher required rate of return when investing in the mortgage and therefore
causes mortgage prices to decrease.
true
49. Strong economic growth tends to reduce the probability that the issuer of a
mortgage will default on its debt payments and therefore tends to decrease mortgage
prices.
false
50. The higher the level of equity invested by the borrower, the higher the probability
that the loan will default.
false
51. Borrowers who have a lower level of income relative to the periodic loan payments
are more likely to default on their mortgages.
true
52. Non U.S. financial institutions never hold mortgages on U.S. property.
false
53. The ____ market accommodates originators of mortgages that desire to sell their
mortgages prior to maturity.
secondary
54. Financial institutions that hold fixed rate mortgages in their asset portfolios are
exposed to ____ risk, because they commonly use funds obtained from short term
customer deposits to make long term mortgage loans.
interest rate
55. From the perspective of the lending financial institution, there is a ____ degree of
interest rate risk for ____maturity mortgages.
higher; longer and lower; shorter
56. During the early years of a mortgage,
most of the monthly payment reflects interest
57. Which of the following will typically require homeowners to ultimately request a new
mortgage?
balloon- payment mortgage
58. Which of the following is not true with respect to a growingequity mortgage?
it involves payment that level off after the first five to ten years of the mortgage
59. ____ economic growth will probably ____ the risk premium on mortgages and ____
the price of mortgages.
weak; decrease; increase
60. The probability that a borrower will default (credit risk) is influenced by all of the
following, except
credit risk is affected by all the above
61. In a short sale of a home:
the lender allows the homeowners to sell the home for less than what is owed on the
mortgage; and the lender does not recover the full amount on the mortgage
62. An investor in interestonly collateralized mortgage obligations (CMOs) would not be
concerned that homeowners will prepay the underlying mortgages.
false
63. The valuation of mortgagebacked securities is difficult because of limited
transparency.
true
64. A(n) _________ problem occurs when a person or institution does not have to bear
the full consequence of its behavior and therefore assumes more risk than it otherwise
would.
moral hazard
65. A __________ is a privately negotiated contract that protects investors against the
risk of default on particular debt securities such as mortgagebacked securities.
credit default swap
66. Speculators sell credit default swaps to benefit from the default of specific subprime
mortgages.
false

Financial institutions that hold fixed-rate mortgages in their asset portfolios are exposed
to ____ risk, because they commonly use funds obtained from short-term customer
deposits to make long-term mortgage loans.
interest rate
____ economic growth will probably ____ the risk premium on mortgages and ____ the
price of mortgages.
Weak; decrease; increase
A financial institution has a higher degree of interest rate risk on a ____ than a ____.
30-year fixed-rate mortgage; 15-year fixed-rate mortgage
A balloon-payment mortgage requires interest payments for a three- to five-year period.
At the end of this period, full payment of the principal (the balloon payment) is required.
True
Collateralized mortgage obligations (CMOs) are generally perceived to have
high degree of interest rate risk
A ____ market accommodates originators of mortgages that desire to sell their
mortgages prior to maturity.
secondary
Mortgages are packaged, but segmented into ____ (or classes) before mortgage-
backed securities are issued.
tranches
Which of the following is not mentioned in your text as a creative mortgage financing
method?
balloon-payment mortgage
Which of the following is not true with respect to a growing-equity mortgage?
It involves payments that level off after the first five to ten years of the mortgage.
The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but
reduces the uncertainty for the ____.
borrower's; originator
A mortgage with low initial payments that increase over time without ever leveling off is
a
growing-equity mortgage.
A ____ mortgage allows the borrower to initially make small payments on the mortgage.
The payments then increase over the first 5 to 10 years and then level off.
graduated payment mortgage
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Since mortgages are rarely sold in the secondary market, they are valued by
institutional investors only at maturity.
False
During a weak economy, the credit risk to a financial institution from investing in
mortgage-backed securities representing subprime mortgages is ____ than that of
mortgage-backed securities representing prime mortgages.
more than
Regardless of what happens to market interest rates, most adjustable-rate mortgages
(ARMs) specify a maximum allowable fluctuation in the mortgage rate per year and over
the mortgage life.
True
When financial institutions originate residential mortgages, the mortgage contract
should probably not specify
the mortgage contract should specify all of the above
____ mortgages enabled more people with relatively lower income, or high existing
debt, or a small down payment to purchase homes.
Subprime
Mortgage lenders normally charge a higher initial interest rate on adjustable-rate
mortgages than on fixed-rate mortgages.
False
The probability that a borrower will default (credit risk) is influenced by all of the
following, except
Credit risk is affected by all of the above.
Rates for adjustable-rate mortgages are commonly tied to the
average Treasury bill rate over the previous year.
At a given point in time, the interest rate offered on a new fixed-rate mortgage is
typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
above
Mortgage companies specialize in
originating mortgages and selling those mortgages.
Fannie Mae and Freddie Mac experienced financial problems during the credit crisis
because they:
invested heavily in subprime mortgages.
Borrowers who have a lower level of income relative to the periodic loan payments are
more likely to default on their mortgages.
True
A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at
the end of which the borrower must pay the full amount of the principal.
False
Mortgage-backed securities are commonly contained within collateralized debt
obligations.
True
Mortgage-backed securities are assigned ratings by:
rating agencies
A financial institution may service a mortgage even after selling it.
True
Which of the following is not a common type of mortgage pass-through securities
according to your text?
balloon-payment mortgage
There is a secondary mortgage market that accommodates originators of mortgages
who desire to sell their mortgages at maturity.
False
"Securitization" refers to the private insurance of conventional mortgages.
False
In an amortization schedule of monthly mortgage payments
interest payments exceed principal payments early on.
The difference between the 30-year mortgages rate and the 30-year Treasury bond rate
is primarily attributable to
credit risk
Which of the following is not a guarantor of federally insured mortgages?
the U.S. Treasury
The higher the level of equity invested by the borrower, the higher the probability that
the loan will default.
False
An institution that originates and holds a fixed-rate mortgage is adversely affected by
____ interest rates; the borrower who was provided the mortgage is adversely affected
by ____ interest rates.
increasing; decreasing
____ was created in 1968 as a corporation that is wholly owned by the federal
government. It supplies funds to low- and moderate-income homeowners indirectly by
facilitating the flow of funds into secondary mortgage markets.
Ginnie Mae
The credit crisis is mostly attributed to the use of:
excessively liberal criteria applied by mortgage originators.
Mortgage companies, commercial banks and savings institutions are the primary
originators of mortgages.
True
During the early years of a mortgage, most of the monthly payment reflects principal.
False
A mortgage which requires interest payments for a three- to five-year period, then full
payment of principal, is a(n)
balloon payment mortgage.
For any given interest rate, the shorter the life of the mortgage, the ____ the monthly
payment and the ____ the total payments over the life of the mortgage.
greater; less