Lecture 10 Flashcards

1
Q

What is a mortgage?

A

A pledge of property to secure a debt

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2
Q

What are the main categories of mortgage?

A
  • Residential
  • Non-residential
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3
Q

What is a mortgagor?

A

The person who owes money

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4
Q

What is a mortgagee?

A

The lender

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5
Q

What is a FRM?

A

Fixed rate mortgage

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6
Q

What is an ARM?

A

Adjustable rate mortgage

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7
Q

What is a fully amortised mortgage?

A

Constant monthly payments until maturity

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8
Q

What are the risks affecting mortgagees?

A
  • Interest rate (ARMs)
  • Default risk
  • Prepayment risk
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9
Q

What is lending without recourse?

A

Mortgagors can forfeit house & walk away

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10
Q

How can default risk be limited?

A
  • Credit history
  • Low loan-to-income ratio
  • Low LTV ratio
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11
Q

How does securitisation benefit borrowers?

A

Lower liquidity premium -> cheaper finance

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12
Q

What is an SPV?

A

Special purpose vehicle - no gearing limits

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13
Q

What caused sub-prime mortgage lending?

A

Originate & hold vs originate to distribute

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14
Q

What is pipeline risk?

A

Some financial institutions held loans which had not yet been securitised or were difficult to sell

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15
Q

What does MBS stand for?

A

Mortgage backed security

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16
Q

What does CMO stand for?

A

Collateralised mortgage obligation

17
Q

What are risks for holders of MBS?

A
  • Government may guarantee against default risk
  • Prepayment risk still a problem
18
Q

What are CMOs for?

A

Redistributing prepayment risk

19
Q

What is credit tranching for?

A

Redistributing credit risk

20
Q

What was a problem with credit tranching?

A

Many senior tranches of sub-prime CMOs were given AAA ratings

21
Q

What are mortgage pass-through strips?

A

Type of CMO which splits cashflows into IO & PO strips

22
Q

How does prepayment affect IO strips?

A

Reduces their value

23
Q

How does prepayment affect PO strips?

A

Increases their value

24
Q

What does ABS stand for?

A

Asset backed securities

25
Q

What are examples of other securitised assets?

A
  • Junk bonds
  • Car loans
  • Credit card receivables
  • Commercial loans
26
Q

How does securitisation benefit investors?

A
  • More liquid
  • Distributes risk
  • Range of asset properties
27
Q

What is ‘greenium’?

A

Green bonds trade at slightly lower yields, showing investor demand

28
Q

What are advantages for firms pursuing ethical objectives?

A
  • Easier to recruit & motivate staff
  • Reduces short-termism
  • Reduces legal & reputational risk
29
Q

What is evidence for greenwashing?

A

Minimal correlation between ESG ratings from different agencies

30
Q

Does higher inflation lead to currency appreciation or depreciation?

A

Depreciation

31
Q

Does lower inflation lead to currency appreciation or depreciation?

A

Appreciation