Exercise
Answer the Following Questions
- 1. All of the following conditions make a mortgage-backed security a potentially risky investment except:
- A. The investor may receive the principal back sooner than anticipated.
- B. The investor may have to hold on to his investment longer than anticipated.
- C. The rate of principal repayment may vary.
- D. Interest rates move up and down with the stock market.
- 2. Which two of the following are true of CMOs?
- I. CMOs are backed by pools of mortgage payments.
- II. CMOs are backed by credit card receivables.
- III. CMOs are structured into tranches.
- IV. CMOs are tax-exempt at the local, state, and federal levels.
- A. I and III
- B. I and IV
- C. II and III
- D. II and IV
- 3. What is the difference between Ginnie Mae and Fannie Mae?
- A. Ginnie Mae is a government agency, while Fannie Mae is privately owned, but chartered by the federal government.
- B. Fannie Mae is a government agency, while Ginnie Mae is privately owned, but chartered by the federal government.
- C. Both are government agencies, but serve different purposes.
- D. Both are privately-held organizations, but Fannie Mae has a history of corruption.
Answers
- 1. D. With mortgage-backed securities, mortgages in the pool can be paid off at any time, making resulting funds unpredictable. Investors never know when the principal on their MBS will be paid off. Prepayment risk is associated with falling interest rates resulting from refinan