Studyhelpline: The total payment amount on an IO strip is

creating conditions where no prepayments occur in the underlying mortgage pool

Monday, June 6, 2016

The total payment amount on an IO strip is

61. The total payment amount on an IO strip is:

A. fixed.

B. equal to the interest rate multiplied by the par value multiplied by the PSA rate schedule.

C. equal to the par value multiplied by the interest rate.

D. unknown until all payments have been made.

E. equal to the total interest computed on the bond's amortization schedule.

Answer

unknown until all payments have been made.

62. The value of an IO strip will most likely increase when:

A. the PSA schedule rate decreases from 200 to 100.

B. market interest rates remain constant.

C. prepayments increase.

D. mortgage refinancings increase.

E. market interest rates decrease significantly.

Answer

the PSA schedule rate decreases from 200 to 100.

63. Which one of the following will maximize the value of an IO strip?

A. prepaying all mortgages in the underlying mortgage pool

B. minimizing the duration of the underlying mortgage pool

C. maximizing the value of the PO strip

D. amortizing the bonds in the underlying pool faster than anticipated

E. creating conditions where no prepayments occur in the underlying mortgage pool

Answer

64. A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. The mortgage principal will initially be paid to which one of the tranches?

A. A-tranche

B. B-tranche

C. C-tranche

D. Z-tranche

E. all tranches on a pro-rata basis

65. A mortgage pool is divided into A, B, C, and Z-tranches based on the textbook example. Which tranche will have the longest life?

A. A-tranche

B. B-tranche

C. C-tranche

D. Z-tranche

E. All tranches will have equal lives.

66. A mortgage pool is divided into A, B, C, and Z-tranches as discussed in the textbook. What happens to the initial interest payment for the Z tranche?

A. It is immediately passed through to holders of Z tranche securities.

B. It is accumulated and held until the Z tranche securities mature.

C. It is exchanged for principal from the A tranche.

D. It is exchanged for principal from the B tranche.

E. It is exchanged for principal from the C tranche.

67. Which one of the following statements regarding PAC bonds is correct?

A. The cash flows from a PAC bond are less certain than those from a Z-tranche bond from a sequential CMO.

B. PAC bondholders receive the residual cash flows from the underlying mortgage pool.

C. PAC bonds are defined by the specific rules which created them.

D. PAC bonds have bounds based on market interest rates.

E. PAC bond cash flows are unaffected by mortgage prepayments.

68. Which one of the following is required for the cash flows on a PAC bond to be predictable?

A. market interest rates must remain constant

B. market interest rates must steadily decline

C. mortgage prepayments must remain within the PAC collar

D. PAC support bonds must be prepaid in a timely manner

E. mortgage prepayments must exceed the specified PSA schedule

69. A PAC support bond is most similar to which tranche in a sequential CMO?

A. A

B. B

C. C

D. Z

E. A PAC bond cannot be compared to a sequential CMO.

70. PAC bondholders receive payments of principal based on which one of the following?

A. an amortization schedule

B. PAC collar's lower PSA prepayment schedule

C. PAC collar's upper PSA prepayment schedule

D. receipt of all principal collected on the underlying pool of mortgages until the bond is paid in full

E. zero principal from the underlying pool of mortgages until after the PAC companion bonds have been paid in full

71. After month 30, assuming that prepayments remain within the PAC collar, the holders of a PAC bond will receive which one of the following payments?

A. a fixed principal payment only

B. a fixed interest payment only

C. a fixed principal payment plus a declining interest payment

D. a declining principal payment only

E. a declining principal payment and a declining interest payment

72. How are the cash flows allocated when actual prepayments fall below a PAC collar's lower bound?

A. The entire cash flow is paid to the non-PAC support bonds until those bonds are paid in full.

B. The cash flows are divided between PAC and non-PAC bonds on a pro-rata basis.

C. PAC payments are recomputed to a reduced fixed amount.

D. The entire cash flow is paid to the PAC bondholders.

E. The interest income is paid to the non-PAC bondholders with all principal amounts paid to the PAC bondholders.

73. Assume that a mortgage pool follows a specified PSA prepayment schedule. Given this, the cash flow yield on the mortgage pool will do which one of the following?

75. You want to borrow $180,000 at 6.25 percent interest. If you assume a 10-year loan, the monthly payment will be _ as compared to _ if you assume a 20-year loan.