QUESTION 1 Which one of the following is a mortgage-backed security that has fir

Question

QUESTION 1

Which one of the following is a mortgage-backed security that has first priority to scheduled principal payments?

0.5 points   

QUESTION 2

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

0.5 points   

QUESTION 3

Which one of the following correctly applies to a mortgage passthrough bond?

0.5 points   

QUESTION 4

You just purchased a GNMA mortgage-backed security. Which one of the following should you expect to receive?

0.5 points   

QUESTION 5

Which one of the following is the measure of interest rate risk for fixed-income securities?

0.5 points   

QUESTION 6

Which one of the following set of mortgage terms will cause the borrower to pay the most interest, assuming the mortgage is paid according to the amortization schedule?

0.5 points   

priority strip bond principal strip amortized principal strip protected amortization class bond principal priority tranche

Explanation / Answer

Question 2 answer

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

When actual prepayments fall below a PAC collar's lower bound there could be insufficient cash flow to satisfy a PAC bond's promised cash flow schedule. In this case, the PAC bond receives all available cash flow and any shortfall is carried forward and paid on a first priority basis from future cash flows. Non-PAC bonds receive no cash flows until all cumulative shortfalls to PAC bonds are paid off.

The entire cash flow is paid to the PAC bondholders.

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