Mortgage Pass Through Securities

Question 1

What are Mortgage Pass Through Securities?

Answer 1

Mortgage Pass Through Securities are financial instruments that represent an ownership interest in a pool of mortgage loans, where the cash flows from the underlying mortgages are passed through to the security holders.

Question 2

True or False: Mortgage Pass Through Securities are backed by a pool of mortgage loans.

Answer 2

True

Question 3

What is the primary risk associated with Mortgage Pass Through Securities?

Answer 3

The primary risk is prepayment risk, where borrowers may pay off their mortgages early, affecting the cash flow to investors.

Question 4

Fill in the blank: The cash flows from the mortgage loans in a Mortgage Pass Through Security are __________ to the investors.

Answer 4

passed through

Question 5

Which of the following is NOT a characteristic of Mortgage Pass Through Securities? A) Monthly payments B) Fixed interest rates C) Direct ownership of properties

Answer 5

C) Direct ownership of properties

Question 6

What type of interest rate risk do investors in Mortgage Pass Through Securities face?

Answer 6

Investors face reinvestment risk due to changing interest rates affecting the likelihood of mortgage prepayments.

Question 7

True or False: Mortgage Pass Through Securities can be traded on secondary markets.

Answer 7

True

Question 8

What is prepayment risk?

Answer 8

Prepayment risk is the risk that borrowers will pay off their mortgage loans earlier than expected, leading to a return of principal to investors sooner than anticipated.

Question 9

Multiple Choice: What typically causes an increase in prepayment risk? A) Falling interest rates B) Rising interest rates C) Stable economic conditions

Answer 9

A) Falling interest rates

Question 10

What are the two main types of Mortgage Pass Through Securities?

Answer 10

The two main types are agency-backed securities and non-agency securities.

Question 11

True or False: Agency-backed Mortgage Pass Through Securities are guaranteed by government-sponsored entities.

Answer 11

True

Question 12

What is the role of the servicer in a Mortgage Pass Through Security?

Answer 12

The servicer is responsible for collecting mortgage payments from borrowers and distributing the cash flows to the security holders.

Question 13

Fill in the blank: The __________ rate is the interest rate that borrowers pay on their mortgage loans in a pool.

Answer 13

coupon

Question 14

What does the term ‘stripped mortgage-backed securities’ refer to?

Answer 14

Stripped mortgage-backed securities refer to securities that separate the principal and interest payments from the underlying mortgages.

Question 15

True or False: Investors in Mortgage Pass Through Securities receive a fixed return regardless of mortgage performance.

Answer 15

False

Question 16

What is the impact of rising interest rates on Mortgage Pass Through Securities?

Answer 16

Rising interest rates can lead to lower prepayment rates, extending the duration of the securities and increasing interest rate risk.

Question 17

Multiple Choice: Which of the following is a benefit of investing in Mortgage Pass Through Securities? A) High liquidity B) Guaranteed returns C) Low risk

Answer 17

A) High liquidity

Question 18

What is the significance of the ‘geographic concentration’ risk in Mortgage Pass Through Securities?

Answer 18

Geographic concentration risk refers to the risk that a significant portion of the underlying mortgages is located in a specific area, making the investment vulnerable to regional economic downturns.

Question 19

Fill in the blank: Mortgage Pass Through Securities are typically issued by __________ or private financial institutions.

Answer 19

government agencies

Question 20

What is the difference between agency and non-agency Mortgage Pass Through Securities?

Answer 20

Agency securities are backed by government-sponsored entities, while non-agency securities are issued by private institutions and are not guaranteed.

Question 21

True or False: The performance of Mortgage Pass Through Securities is directly linked to the performance of the underlying mortgage loans.

Answer 21

True

Question 22

What does the term ‘yield spread’ refer to in the context of Mortgage Pass Through Securities?

Answer 22

Yield spread refers to the difference in yield between Mortgage Pass Through Securities and other fixed-income securities, reflecting their risk and return characteristics.

Question 23

Multiple Choice: Which of the following factors can affect the cash flow of Mortgage Pass Through Securities? A) Borrower defaults B) Changes in interest rates C) Both A and B

Answer 23

C) Both A and B

Question 24

What is the significance of the ‘average life’ of a Mortgage Pass Through Security?

Answer 24

The average life indicates the expected time period over which the security will return principal to investors, influenced by prepayment speeds.