Exam 2 Questions | FRL 315 - Financial Institutions and Markets, Quizzes of Financial Market

Download Exam 2 Questions | FRL 315 - Financial Institutions and Markets and more Quizzes Financial Market in PDF only on Docsity! TERM 1 What are the prime vs subprime mortgages? DEFINITION 1 Prime- borrower meets traditional lending standardsSubprime - borrower does not qualify for prime loan relatively lower income high existing debt can make only a small down payment TERM 2 Whate are insured vs conventional mortgages? DEFINITION 2 Insured - loan is insured by the FHA or VAConventional - loan is not insured by FHA or VA but can be privately insured TERM 3 Know the major types of residential mortgages. DEFINITION 3 Fixed-Rate mortgages adjustable-rate mortgages (ARMs) Graduated-payment mortgages (GPMs) Growing-equity mortgages Second mortgages Shared-appreciation mortgages Balloon payment mortgages TERM 4 What are the risks from investing in mortgages? DEFINITION 4 Credit risks - the risk that borrower will make a late payment or will defaultInterest rate risk - the risk that value of mortgage will fall when interest rate risePrepayment risk - the risk that the borrower will prepay the mortgage when interest rates fall TERM 5 What is mortgage-backed securities? What is securitization? DEFINITION 5 Securitization - the pooling and repackaging of loans into securitiessecurities are then sold to investors, who become the owners of the loans represented by those securitiesmortgage-backed securitiesare bonds that are backed by pools of mortgage loans. TERM 6 What are the major types of mortgage-backed securities? DEFINITION 6 GNMA (Ginnie Mae) mortgage backed securities Private-label pass throughs FNMA (Fannie Mae) mortgage backed securities FHLMC participation certification Collateralized mortgage obligations (CMOs) TERM 7 What caused mortgage credit crisis? DEFINITION 7 Interest rates increased in 2006, which made it more difficult for existing homeowners with adjustable-rate mortgages to make their mortgage payments low initial "teaser rates" were expiring and these homeowners also faced higher mortgage payments by june 2008, 9 percent of all americans homeowners were either behind on their mortgage payments or were in foreclosure. TERM 8 Difference between a commercial bank's balance sheet and that of a non financial firm, DEFINITION 8 commercial bank funds Liabilities - deposits, other liabilities and equity Assets - Loans, Other financial assets, other non-financial assets Non-Financial Firms Liabilities - Loans, Other liabilities and equity Assets - Deposits, Other financial assets, other non- financial assets TERM 9 What is the effect of the change of interstate regulation of 1994? DEFINITION 9 more freedom to acquire other banks across state lines.competition between banks occur more oftenThe number of banks today is about one-half that existed in 1985The largest 100 banks now represent about 75% of all bank assets vs 50% in 1985 TERM 10 What is Financial services modernization act of 1999 DEFINITION 10 the law that works to partially deregulate the financial industry. The Financial Services Modernization Act of 1999 allows companies working in the financial sector to integrate their operations and invest in each others businesses and consoldiate. This includes businesses such as insurance companies, brokerage firms, investment dealers, commercial banks etc.