Mortgage Pass Through Securities Flashcards
What are Mortgage Pass Through Securities?
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.
True or False: Mortgage Pass Through Securities are backed by a pool of mortgage loans.
True
What is the primary risk associated with Mortgage Pass Through Securities?
The primary risk is prepayment risk, where borrowers may pay off their mortgages early, affecting the cash flow to investors.
Fill in the blank: The cash flows from the mortgage loans in a Mortgage Pass Through Security are __________ to the investors.
passed through
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
C) Direct ownership of properties
What type of interest rate risk do investors in Mortgage Pass Through Securities face?
Investors face reinvestment risk due to changing interest rates affecting the likelihood of mortgage prepayments.
True or False: Mortgage Pass Through Securities can be traded on secondary markets.
True
What is prepayment risk?
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.
Multiple Choice: What typically causes an increase in prepayment risk? A) Falling interest rates B) Rising interest rates C) Stable economic conditions
A) Falling interest rates
What are the two main types of Mortgage Pass Through Securities?
The two main types are agency-backed securities and non-agency securities.
True or False: Agency-backed Mortgage Pass Through Securities are guaranteed by government-sponsored entities.
True
What is the role of the servicer in a Mortgage Pass Through Security?
The servicer is responsible for collecting mortgage payments from borrowers and distributing the cash flows to the security holders.
Fill in the blank: The __________ rate is the interest rate that borrowers pay on their mortgage loans in a pool.
coupon
What does the term ‘stripped mortgage-backed securities’ refer to?
Stripped mortgage-backed securities refer to securities that separate the principal and interest payments from the underlying mortgages.
True or False: Investors in Mortgage Pass Through Securities receive a fixed return regardless of mortgage performance.
False
What is the impact of rising interest rates on Mortgage Pass Through Securities?
Rising interest rates can lead to lower prepayment rates, extending the duration of the securities and increasing interest rate risk.
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
A) High liquidity
What is the significance of the ‘geographic concentration’ risk in Mortgage Pass Through Securities?
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.
Fill in the blank: Mortgage Pass Through Securities are typically issued by __________ or private financial institutions.
government agencies
What is the difference between agency and non-agency Mortgage Pass Through Securities?
Agency securities are backed by government-sponsored entities, while non-agency securities are issued by private institutions and are not guaranteed.
True or False: The performance of Mortgage Pass Through Securities is directly linked to the performance of the underlying mortgage loans.
True
What does the term ‘yield spread’ refer to in the context of Mortgage Pass Through Securities?
Yield spread refers to the difference in yield between Mortgage Pass Through Securities and other fixed-income securities, reflecting their risk and return characteristics.
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
C) Both A and B
What is the significance of the ‘average life’ of a Mortgage Pass Through Security?
The average life indicates the expected time period over which the security will return principal to investors, influenced by prepayment speeds.
