Mortgage-backed securities are
above
commonly contained within
collateralized debt obligations.
a. True
b. False
A.True
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 the above
a. 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. all of the above are very common
b.
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
c. increasing; decreasing
Rates for adjustable-rate mortgages are
commonly tied to the
a. average prime rate over the previous
year.
b. Feds discount rate over the previous
year.
c. average Treasury bill rate over the
previous year.
d. average Treasury bond rate over the
previous year.
c. average Treasury bill rate over the
previous year.
Caps on mortgage rate fluctuations with
adjustable-rate mortgages (ARMs) are
typically
a. 2 percent per year and 5 percent for
the mortgage lifetime.
b. 5 percent per year and 15 percent for
the mortgage lifetime.
c. 0 percent per year and 10 percent for
the mortgage lifetime.
d. 3 percent per year and 8 percent for
the mortgage lifetime.
a. 2 percent per year and 5 percent
for the mortgage lifetime.
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.
b. 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.
c. 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; lower
c. lower; greater
d. lower; lower
b. greater; lower
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
a. 30-year fixed-rate mortgage; 15-
year fixed-rate mortgage
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
b. False
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 the above
c. 1,014; 750
A mortgage that 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.
b. balloon-payment mortgage.
A mortgage with low initial payments
that increase over time without ever
leveling off is a
a. graduated payment mortgage.
b. growing-equity mortgage.
c. second mortgage.
d. shared-appreciation mortgage.
b. growing-equity mortgage.
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.
a. higher than; behind
b. equal to that; equal to
c. lower than; ahead of
d. higher than; ahead of
e. lower than; behind
a. graduated-payment mortgage
Mortgage companies, commercial
banks, and savings institutions are the
primary originators of mortgages.
a. True
b. False

a. higher than; behind a. True

Which of the following mortgages allows ____ was created in 1968 as a

the home purchaser to obtain a corporation that is wholly owned by the
mortgage at a below-market interest federal government. It guarantees
rate throughout the life of the mortgage? payment on mortgages that meet
a. second mortgage specific criteria.
b. growing-equity mortgage a. Freddie Mac
c. graduated-payment mortgage b. Ginnie Mae
d. shared-appreciation mortgage c. Fannie Mae
d. None of the above
d. shared-appreciation mortgage
b. Ginnie Mae
A ____ mortgage allows the borrower to
initially make small payments on the "Securitization" refers to the private
mortgage. The payments then increase insurance of conventional mortgages.
over the first 5 to 10 years and then a. True
level off. b. False
a. graduated-payment mortgage
b. growing-equity mortgage b. False
c. second mortgage
d. shared-appreciation mortgage
A financial institution may service a
mortgage even after selling it.
a. True
b. False
a. True
The difference between the 30-year
mortgage rate and the 30-year Treasury
bond rate is primarily attributable to
a. interest rate risk.
b. reinvestment rate risk.
c. credit risk.
d. insurance risk.
c. credit risk.
Which of the following is not a guarantor
of federally insured mortgages?
a. Federal Housing Administration
(FHA)
b. Veterans Administration (VA)
c. Federal Deposit Insurance
Corporation (FDIC)
d. All of the above are guarantors of
federally insured mortgages.
c. Federal Deposit Insurance
Corporation (FDIC)
___ 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
c. Weak; decrease; increase
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.
a. balloon-payment
b. graduated-payment
c. shared-appreciation
d. growing-equity
e. none of the above
b. graduated-payment
An adjustable-rate mortgage increases
interest rate risk for the ____, but
reduces interest rate risk for the ____.
a. originator; borrower
b. borrower; originator
c. government; originator c. balloon-payment mortgage
d. none of the above certificates

b. borrower; originator ____ risk is the risk that a borrower may

prepay the mortgage in response to a
When financial institutions originate decline in interest rates.
residential mortgages, the mortgage a. Interest rate
contract should not specify b. Credit
a. whether the mortgage is federally c. Prepayment
insured. d. Reinvestment rate
b. the amount of the loan.
c. whether the interest rate is fixed or c. Prepayment
adjustable.
d. the maturity. Mortgage-backed securities are
e. the mortgage contract should specify assigned ratings by:
all of the above a. rating agencies.
b. the Treasury.
a. whether the mortgage is federally c. the Fed.
insured. d. the mortgage originator.

Which of the following is not a common a. rating agencies.

type of mortgage-backed security
according to your text? In a collateralized mortgage obligation
a. participation certificates (PCs) (CMO), mortgages are segmented into
b. collateralized mortgage obligations ____ (or classes).
(CMOs) a. balloon payments
c. balloon-payment mortgage b. caps
certificates c. tranches
d. private-label pass-through securities d. strips
e. All of the above are common types of
mortgage pass-through securities. c. tranches
The credit crisis is mostly attributed to existing debt, or a small down payment
the use of: to purchase homes.
a. strict criteria applied by mortgage a. Prime
originators. b. Balloon
b. liberal criteria applied by mortgage c. Amortized
originators. d. Subprime
c. very tough credit ratings applied to
mortgages. d. Subprime
d. fixed-rate mortgages with long terms
to maturity. The secondary mortgage market
accommodates originators of mortgages
b. liberal criteria applied by mortgage who desire to sell their mortgages
originators. before maturity.
a. True
Fannie Mae and Freddie Mac b. False
experienced financial problems during
the credit crisis because they: a. True
a. were unwilling to finance new
mortgages. Regardless of what happens to market
b. invested heavily in balloon interest rates, most adjustable-rate
mortgages. mortgages (ARMs) specify a maximum
c. invested only in prime mortgages that allowable fluctuation in the mortgage
offered very low returns. rate per year and over the mortgage life.
d. invested heavily in subprime a. True
mortgages. b. False

d. invested heavily in subprime a. True

mortgages.
Some adjustable-rate mortgages
____ mortgages enabled more people (ARMs) contain an option clause that
with relatively lower income, or high allows mortgage holders to switch to a
fixed- rate mortgage within a specified b. False
period.
a. True Mortgages are rarely sold in the
b. False secondary market.
a. True
a. True b. False

Mortgage lenders normally charge a b. False

higher initial interest rate on adjustable-
rate mortgages than on fixed-rate An increase in either the risk-free rate or
mortgages. the risk premium on a fixed-rate
a. True mortgage results in a higher required
b. False rate of return when investing in the
mortgage and therefore causes the
b. False mortgage price to decrease.
a. True
A balloon-payment mortgage requires b. False
interest payments for a three- to five-
year period. At the end of this period, full a. True
payment of the principal (the balloon
payment) is required. Strong economic growth tends to reduce
a. True the probability that the issuer of a
b. False mortgage will default on its debt
payments and therefore tends to
a. True decrease mortgage prices.
a. True
During the early years of a mortgage, b. False
most of the monthly payment reflects
principal. b. False
a. True
b. False
The higher the level of equity invested
by the borrower, the higher the
probability that the loan will default.
a. True
b. False
b. False
Borrowers who have a lower level of
income relative to the periodic loan
payments are more likely to default on
their mortgages.
a. True
b. False
b. secondary
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. exchange rate
b. prepayment
c. reinvestment rate
d. interest rate
e. exchange rate

a. True d. interest rate

Non-U.S. financial institutions never From the perspective of the lending

hold mortgages on U.S. property. financial institution, there is a ____
a. True degree of interest rate risk for ____
b. False maturity mortgages.
a. higher; shorter
b. False b. higher; longer
c. lower; shorter
The ____ market accommodates d. lower; higher
originators of mortgages that desire to e. Answers B and C are correct
sell their mortgages prior to maturity.
a. primary e. Answers B and C are correct
b. secondary
c. money In the earlier years of a mortgage,
d. none of the above 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. all of the monthly payment reflects
principal reduction.
b. most of the monthly payment reflects
interest.
Which of the following will typically
require homeowners to ultimately
request a new mortgage?
a. graduated-payment mortgage (GPM)
b. growing-equity mortgage
c. balloon-payment mortgage
d. shared-appreciation mortgage
c. balloon-payment mortgage
Which of the following is not true with
respect to a growing-equity mortgage?
a. It is similar to a graduated-payment
mortgage
b. It allows borrowers to initially make
small payments on the mortgage.
c. It involves increased payments, on a
graduated basis, over the first five to ten
years of the mortgage.
d. It involves payments that level off
after the first five to ten years of the
mortgage.
d. It involves payments that level off
after the first five to ten years of the
mortgage.
Which of the following is not a correct
description of qualified mortgages?
a. They must comply with regulations
issued by the Consumer Financial
Protection Bureau.
b. Their term cannot exceed 30 years.
c. They cannot be interest-only
mortgages or result in negative
amortization.
d. They must be retained by the lending
institution that originated the mortgages
and cannot be sold.
e. They place limits on the borrower's
debt-to-income ratio.
d. They must be retained by the lending
institution that originated the mortgages
and cannot be sold.
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 borrowers income level.
d. the borrowers credit history.
e. Credit risk is affected by all of the
above.
a. economic conditions.
In a short sale of a home:
a. the lender forecloses and then sells
the home for less than what is owed on
the mortgage.
b. the lender allows the homeowner to
sell the home for less than what is owed
on the mortgage.
c. the lender does not recover the full
amount of the mortgage.
d. B and C
e. A and C
d. B and C
An investor in interest-only collateralized
mortgage obligations (CMOs) would not
be concerned that homeowners will
prepay the underlying mortgages.
a. True
b. False
b. False
The valuation of mortgage-backed
securities is difficult because of limited
transparency.
a. True
b. False
a. True
A(n) _________ problem occurs when a
person or institution does not have to
bear the full consequences of its
behavior and therefore assumes more
risk than it otherwise would.
a. asymmetric information
b. moral hazard
c. risk adjustment
d. specific hazard
b. moral hazard
A __________ is a privately negotiated
contract that protects investors against
the risk of default on particular debt
securities such as mortgage-backed
securities.
a. default insurance contract
b. default risk swap
c. credit default swap
d. collateralized debt obligation
c. credit default swap
Speculators sell credit default swaps to
benefit from the default of specific
subprime mortgages.
a. True
b. False
b. False
Financial institutions may purchase
credit default swaps on mortgages if
they expect defaults on many
mortgages.
a. True
b. False
a. True
Financial institutions may sell credit
default swaps on mortgages if they
expect defaults on many mortgages.
a. True
b. False
b. False
At a given point in time, the price of a
credit default swap contract should be
________ related to the default risk of
the securities covered by the contract.
For a given set of securities that are
covered by a credit default swap, the
price of
the contract should be _______ related
to the default risk as it changes over
time.
a. positively; positively
b. positively; inversely
c. Inversely; positively
d. inversely; inversely
a. positively; positively
Bear Stearns commonly used
__________ as collateral when
borrowing short-term funds, but its
funding was cut off because prospective
creditors questioned the quality of the
collateral.
a. commercial paper
b. Treasury securities
c. its stock
d. mortgages
d. mortgages
Lehman Brothers commonly used
_________ as collateral when borrowing
short-term funds, but its funding was cut
off because prospective creditors
questioned the quality of the collateral.
a. commercial paper
b. Treasury securities
c. its stock be concerned that homeowners will
d. mortgages prepay the underlying mortgages.
a. False
d. mortgages b. True

Which of the following will typically a. False

require homeowners to ultimately
request a new mortgage? The valuation of mortgage-backed
a. shared-appreciation mortgage securities is difficult because of limited
b. balloon-payment mortgage transparency.
c. growing-equity mortgage a. True
d. graduated-payment mortgage (GPM) b. False

b. balloon-payment mortgage a. True

In a short sale of a home: Strong economic growth tends to reduce

a. the lender does not recover the full the probability that the issuer of a
amount of the mortgage. mortgage will default on its debt
b. A and C payments
c. the lender allows the homeowner to and therefore tends to decrease
sell the home for less than what is owed mortgage prices.
on the mortgage. a. True
d. B and C b. False
e. the lender forecloses and then sells
the home for less than what is owed on b. False
the mortgage.
Caps on mortgage rate fluctuations with
d. B and C adjustable-rate mortgages (ARMs) are
typically
An investor in interest-only collateralized a. 0 percent per year and 10 percent for
mortgage obligations (CMOs) would not the mortgage lifetime.
b. 3 percent per year and 8 percent for ___ risk is the risk that a borrower may
the mortgage lifetime. prepay the mortgage in response to a
c. 5 percent per year and 15 percent for decline in interest rates.
the mortgage lifetime. a. Interest rate
d. 2 percent per year and 5 percent for b. Reinvestment rate
the mortgage lifetime. c. Credit
d. Prepayment
d. 2 percent per year and 5 percent for
the mortgage lifetime. d. Prepayment

Which of the following is not a guarantor Bear Stearns commonly used

of federally insured mortgages? __________ as collateral when
a. All of the above are guarantors of borrowing short-term funds, but its
federally insured mortgages. funding was cut off
b. Federal Housing Administration because prospective creditors
(FHA) questioned the quality of the collateral.
c. Veterans Administration (VA) a. Treasury securities
d. Federal Deposit Insurance b. mortgages
Corporation (FDIC) c. commercial paper
d. its stock
d. Federal Deposit Insurance
Corporation (FDIC) b. mortgages

Mortgage companies, commercial The probability that a borrower will

banks, and savings institutions are the default (credit risk) is influenced by all of
primary originators of mortgages. the following, except
a. False a. Credit risk is affected by all of the
b. True above.
b. the borrower's credit history.
b. True c. the borrower's income level.
d. the level of equity invested by the
borrower
e. economic conditions
e. economic conditions
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.
a. lower than; ahead of
b. lower than; behind
c. higher than; ahead of
d. higher than; behind
e. equal to that; equal to
d. higher than; behind
____ was created in 1968 as a
corporation that is wholly owned by the
federal government. It guarantees
payment on
mortgages that meet specific criteria.
a. None of the above
b. Fannie Mae
c. Freddie Mac
d. Ginnie Mae
d. Ginnie Mae
The higher the level of equity invested
by the borrower, the higher the
probability that the loan will default.
a. False
b. True
a. False
A financial institution has a higher
degree of interest rate risk on a ____
than a ____.
a. 15-year variable-rate mortgage; 15-
year fixed-rate mortgage
b. 15-year fixed-rate mortgage; 30-year
fixed-rate mortgage
c. 30-year variable-rate mortgage; 30-
year fixed-rate mortgage
d. 30-year fixed-rate mortgage; 15-year
fixed-rate mortgage
c. 30-year variable-rate mortgage; 30-
year fixed-rate mortgage
The difference between the 30-year
mortgage rate and the 30-year Treasury
bond rate is primarily attributable to
a. reinvestment rate risk.
b. insurance risk.
c. credit risk.
d. interest rate risk.
c. credit risk.
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. graduated-payment mortgage
c. shared-appreciation mortgage
d. growing-equity mortgage
d. growing-equity mortgage
From the perspective of the lending
financial institution, interest rate risk is
a. lower on a 15-year fixed-rate
mortgage than on a 30-year fixed-rate
mortgage.
b. lower on a 30-year fixed-rate
mortgage than on a 15-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
a. lower on a 15-year fixed-rate
mortgage than on a 30-year fixed-rate
mortgage.
The secondary mortgage market
accommodates originators of mortgages
who desire to sell their mortgages
before maturity.
a. False
b. True
b. True
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. decreasing; increasing
b. stable; decreasing
c. increasing; stable
d. increasing; decreasing
d. increasing; decreasing
Non-U.S. financial institutions never
hold mortgages on U.S. property.
a. True
b. False
b. False
The ____ market accommodates
originators of mortgages that desire to
sell their mortgages prior to maturity.
a. primary
b. none of the above
c. secondary
d. money
c. secondary
In the earlier years of a mortgage,
a. all of the monthly payment reflects
principal reduction.
b. most of the monthly payment reflects
principal reduction.
c. about half of the monthly payment
reflects interest.
d. most of the monthly payment reflects
interest.
d. most of the monthly payment reflects
interest.
Mortgage companies specialize in
a. borrowing money through the creation
of mortgages that is used to invest in
real estate.
b. originating mortgages and selling
those mortgages.
c. purchasing mortgages originated by
other financial institutions.
d. investing and maintaining mortgages
that they create
b. originating mortgages and selling
those mortgages.
Rates for adjustable-rate mortgages are
commonly tied to the
a. Fed's discount rate over the previous
year.
b. average Treasury bond rate over the
previous year.
c. average Treasury bill rate over the
previous year.
d. average prime rate over the previous
year.
c. average Treasury bill rate over the
previous year.
A __________ is a privately negotiated
contract that protects investors against
the risk of default on particular debt
securities such as mortgage-backed
securities.
a. default insurance contract
b. default risk swap
c. credit default swap
d. collateralized debt obligation
c. credit default swap
Some adjustable-rate mortgages
(ARMs) contain an option clause that
allows mortgage holders to switch to a
fixedrate
mortgage within a specified period.
a. True
b. False
a. True
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.
a. True
b. False
a. True
An adjustable-rate mortgage increases
interest rate risk for the ____, but
reduces interest rate risk for the ____.
a. borrower; originator
b. none of the above
c. originator; borrower
d. government; originator
a. borrower; originator
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.
a. False
b. True
b. True
"Securitization" refers to the private
insurance of conventional mortgages.
a. False
b. True
a. False
Federally insured mortgages guarantee
a. that the interest rate will not increase
during the life of the mortgage.
b. the lending financial institution a
selling price for the mortgage in the
secondary market.
c. all of the above
d. loan repayment to the lending
financial institution.
d. loan repayment to the lending
financial institution.
During the early years of a mortgage,
most of the monthly payment reflects
principal.
a. False
b. True
a. False
Fannie Mae and Freddie Mac
experienced financial problems during
the credit crisis because they:
a. invested heavily in subprime
mortgages.
b. invested heavily in balloon
mortgages.
c. were unwilling to finance new
mortgages.
d. invested only in prime mortgages that
offered very low returns.
a. invested heavily in subprime
mortgages.
Mortgage-backed securities are
assigned ratings by:
a. the Fed.
b. rating agencies.
c. the Treasury.
d. the mortgage originator.
b. rating agencies.
An increase in either the risk-free rate or
the risk premium on a fixed-rate
mortgage results in a higher required
rate of
return when investing in the mortgage
and therefore causes the mortgage
price to decrease.
a. False
b. True
b. True
Financial institutions may sell credit
default swaps on mortgages if they
expect defaults on many mortgages.
a. False
b. True
a. False
Mortgage-backed securities are
commonly contained within
collateralized debt obligations.
a. True
b. False
a. True
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; 750
b. none of the above
c. 1,014; 264
d. 1,241; 750

a. 1,014; 750

Which of the following is not true with

respect to a growing-equity mortgage?
a. It involves payments that level off
after the first five to ten years of the
mortgage.
b. It allows borrowers to initially make
small payments on the mortgage.
c. It involves increased payments, on a
graduated basis, over the first five to ten
years of the mortgage.
d. It is similar to a graduated-payment
mortgage

a. It involves payments that level off

after the first five to ten years of the
mortgage.