chapter 9 mortage fund

Question 2

Which one of the following statements regarding interest rates in the capital market is TRUE?

1. Usually, the longer the term of the investment, the lower the interest must be paid to the investor.
2. The more risk an investment poses, the higher the rate of interest charged.
3. Due to the very low risk present with a government bond, there is no capital risk associated with it.
4. Second or third mortgages are more secure investments than first mortgages.

Answer 2

Correct Answer: 2

Option (2) is correct because the more risk an investment poses, the higher the rate of interest charged.

Option (1) is incorrect because a higher interest must be paid to the investor to induce them to lock in the funds, for longer term investments. Although government bonds have a very low risk present, there is capital risk present. However, the only capital risk is price fluctuation before the date the bond is redeemed and the possibility of a fall in the value of money. Therefore, Option (3) is incorrect.

Option (4) is incorrect because second or third mortgages are less secure investments than first mortgages. Therefore, second mortgages require higher interest rates.

Question 3

Which one of the following statements regarding the sources of mortgage funds is TRUE?

1. Both federal and provincial governments provide mortgage loans.
2. Most mortgage loans are initiated by private lenders.
3. The life insurance industry remains the most important source of mortgage funds in Canada.
4. Chartered banks are currently one of the smallest sources of institutional mortgage funds in Canada.

Answer 3

Correct Answer: 1

Option (1) is correct; federal and provincial governments provide mortgage loans.

Option (2) is incorrect because most mortgage loans are not initiated by private lenders.

Option (3) is incorrect because the life insurance industry is not a significant source of mortgage funds in Canada.

Option (4) is incorrect because chartered banks are the largest source of institutional mortgage funds in Canada.

Question 4

Which of the following is NOT one of the mortgage investment vehicles designed to increase the supply of mortgage funds and to ease access to the mortgage market for small investors?

1. Canada mortgage bonds
2. Mortgage investment corporations
3. Mortgage hedging options
4. Mortgage-backed securities

Answer 4

Correct Answer: 3

Option (3) is correct because a mortgage hedging option is not a mortgage investment vehicle that exists in Canada to increase mortgage supply and ease access of the mortgage market to small investors.

Options (1), (2), and (4) are incorrect because Canada mortgage bonds, mortgage investment corporations, and mortgage-backed securities are all investment vehicles discussed in the manual that help to increase mortgage supply and ease access to the mortgage market for small investors.