Exam 3 with Answer Key for Financial Systems | FIN 3113, Exams of Finance

Download Exam 3 with Answer Key for Financial Systems | FIN 3113 and more Exams Finance in PDF only on Docsity! 1 . If interest rates fall below the coupon rate on the mortgages in a pool, which of the following are likely? I. The value of an IO may fall rather than rise II. The value of a PO will rise, but by less than a similar straight coupon bond III. The value of a PO will rise, but by more than a similar straight coupon bond IV. The cash flows to a pass through holder will fall this month Student Response Value Correct Answer Feedback 1. A) II and IV only 2. B) I and III only 3. C) I, II and IV only 4. D) III and IV only 0% 5. E) I, III and IV only Score: 0/2.22 2 . _____________________ is the process of taking possession of the mortgaged property to satisfy the debt in the event of failure to repay the mortgage and foregoing claim to any deficiency. Student Response Value Correct Answer Feedback A. Perfecting collateral B. Foreclosure 100% C. Power of sale D. Conditions precedent E. Lien enforcement Score: 2.22/2.22 3 . Which one of the following 5 C's of credit is NOT correctly defined? Student Response Value Correct Answer Feedback A. Capacity – Whether the borrower has 100% Student Response Value Correct Answer Feedback enough other credit available to pay off the loan in the event of cash flow problems. B. Capital – The borrower's equity. C. Character – A measure of the borrower's intention/ willingness to repay the loan. D. Conditions – Assessing how economic conditions could affect the borrower's ability to repay the loan. E. Collateral – An asset of the borrower which the lender may seize in the event of default on the loan. Score: 2.22/2.22 4 . Most loan policies specify a maximum loan to value (LTV) ratio on real estate loans. The LTV is a ratio of Student Response Value Correct Answer Feedback A. Book / market value of the loan B. Loan amount / borrower's personal equity Student Response Value Correct Answer Feedback B. II and III only 100% C. II, III and IV only D. I, II and III only E. I, II, III and IV Score: 2.22/2.22 9 . Important buyers of loans include all but which one of the following? Student Response Value Correct Answer Feedback 1. A) Foreign banks 2. B) Insurance companies 3. C) Closed-end bank loan mutual funds 4. D) Vulture funds 5. E) Credit unions 100% Score: 2.22/2.22 1 0 . The risk that an unanticipated increase in liability withdrawals may cause an FI to have to sell assets at fire sale prices is an example of Student Response Value Correct Answer Feedback A. Credit risk B. Liquidity risk 100% C. Interest rate risk D. Sovereign risk Student Response Value Correct Answer Feedback E. Technology risk Score: 2.22/2.22 1 1 . Risk arising from trading activities is termed Student Response Value Correct Answer Feedback A. Credit risk B. Liquidity risk C. Interest rate risk D. Sovereign risk E. Market risk 100% Score: 2.22/2.22 1 2 . Second Bank now offers web banking services. Last week a computer glitch posted all web deposit transfers to the wrong accounts. This is an example of Student Response Value Correct Answer Feedback A. Credit risk B. Liquidity risk C. Stupidity risk D. Technological risk E. Operational risk 100% Score: 2.22/2.22 1 3 . MONDEX spent $50 million to develop the Smart Card, but tests of prototypes in New Student Response Value Correct Answer Feedback A. Credit risk B. Liquidity risk C. Stupidity risk D. Technological risk 100% E. Operational risk Score: 2.22/2.22 1 4 . Liquidity risk arises from I. Unexpected loan demand II. Unexpected deposit withdrawals III. Anticipated drawdown on a credit line IV. Loan defaults Student Response Value Correct Answer Feedback A. I only B. II only C. I, II and IV only D. III only E. I, II and III only 0% Score: 0/2.22 1 5 . A thrift makes long term fixed rate mortgages funded with short term deposits and then interest rates rise. Which of the following is true? Student Response Value Correct Answer Feedback 2 0 . Advantages of loan sales and securitization typically include all but which one of the following? Student Response Value Correct Answer Feedback A. Reduction in credit risk B. Reduction in interest rate risk C. Increase in liquidity of the balance sheet D. Reduction in regulatory tax burden E. Increase in net interest income 100% Score: 2.22/2.22 2 1 . A pass-through security is best characterized as Student Response Value Correct Answer Feedback A. A security with a prorata claim to the underlying pool of assets 100% B. A multi-class mortgage backed bond C. A bond backed by real estate D. A part of a loan sale E. None of the above Score: 2.22/2.22 2 2 . Which one of the following types of transactions leaves the assets on the balance sheet? Student Response Value Correct Answer Feedback A. Loan sale without recourse B. GNMA pass throughs issued backed by mortgages placed in trust C. CMOs issued using mortgage pool as collateral D. Mortgage backed bonds issued 100% E. None of the above Score: 2.22/2.22 2 3 . For a loan sold with recourse Student Response Value Correct Answer Feedback A. The loan seller has no further obligation at all to the buyer B. The loan seller removes the assets from the balance sheet and does not report a contingent liability in the footnotes C. The loan buyer Student Response Value Correct Answer Feedback cannot collect from the loan seller in the event of borrower default D. No reserve requirement is imposed E. None of the above 100% Score: 2.22/2.22 2 4 . ______________ are specialized investment funds established to invest in distressed loans. Student Response Value Correct Answer Feedback A. IOs B. POs C. CMOs D. Vulture funds 100% E. Mutual funds Score: 2.22/2.22 2 5 . The major government-sponsored agencies involved in securitization of home mortgage loans are: Student Response Value Correct Answer Feedback A. GNMA B. FNMA C. FHLMC D. All of the above 100% Student Response Value Correct Answer Feedback 2. B) CMO 3. C) HLT loan 4. D) low recourse loan 5. E) distressed loan 0% Score: 0/2.22 3 1 . Banks were willing to swap LDC loans for Brady bonds because: Student Response Value Correct Answer Feedback 1. A) Brady bonds carried higher interest rates than the loans 2. B) The bonds had variable interest rates 3. C) The bonds were marketable and the loans were not 100% 4. D) The bonds were uncollateralized 5. E) None of the above Score: 2.22/2.22 3 2 . The act of buying a share in a loan syndication with limited contractual control and rights over the borrower is called a Student Response Value Correct Answer Feedback 1. A) correspondent loan Student Response Value Correct Answer Feedback 2. B) loan assignment 3. C) HLT loan 4. D) loan participation 100% 5. E) distressed loan Score: 2.22/2.22 3 3 . In a 3 class sequential pay CMO, if we consider Class B holders as having average prepayment risk then Class A holders have _____________ prepayment risk and Class C holders have _____________ prepayment risk. Student Response Value Correct Answer Feedback 1. A) Above average; below average 100% 2. B) Below average; below average 3. C) Below average; above average 4. D) Above average; above average Score: 2.22/2.22 3 4 . Which one of the following forms of securitization is usually "double securitization?" Student Response Value Correct Answer Feedback 1. A) Mortgage backed bonds 2. B) CMO 3. C) Pass-through 0% Student Response Value Correct Answer Feedback 4. D) Loan sale Score: 0/2.22 3 5 . Loan sales are likely to continue because Student Response Value Correct Answer Feedback A. They can increase near term reported earnings B. They reduce the amount of capital required C. More corporate borrowers have access to the commercial paper market D. A and B only 100% E. A, B and C Score: 2.22/2.22 3 6 . If a mortgage pass through experiences large prepayments early on in the life of the security the result will be that pass through holders will receive _______ than expected cash flows early on and _______ than expected cash flows later on. Student Response Value Correct Answer Feedback A. greater; less B. greater; greater 0% C. less; greater Student Response Value Correct Answer Feedback B. diversification 100% C. more firm-specific risk exposure D. reduced operational risk E. reduced off balance sheet risk Score: 2.22/2.22 4 1 . Why should underwater borrowers care the mortgage market? Student Response Value Correct Answer Feedback 1. A) They owe more on their mortgages than their homes are worth. 2. B) Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties. 3. C) Rising negative equity bolsters the case for higher down payments for qualified residential mortgage, especially as home prices continue to slide. 4. D) The more borrowers in a negative equity position, the more Student Response Value Correct Answer Feedback may intentionally default on their loans in order to try for principal write down. 5. E) All of the above. 100% Score: 2.22/2.22 4 2 . Which of the following(s) is/are the potential benefits provided by Fannie Mae and Freddie Mac to the mortgage market in normal economic conditions? Student Response Value Correct Answer Feedback 1. A) Fannie and Freddie allow people to borrow at lower rates 2. B) A guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers. 3. C) Fannie and Freddie make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. 4. D) All of the above. 100% Score: 2.22/2.22 4 3 . Which of the following is not a possible consequence of closing Freddie Mac and Fannie Mae? Student Response Value Correct Answer Feedback 1. A) 30-year mortgage may fade away 2. B) Interest rates would rise for most borrowers 3. C) Lenders could charge lower fees for locking in an interest rate before taking out a loan 100% 4. D) Borrowers in rural and urban areas could face higher rates than those in the suburbs Score: 2.22/2.22 4 4 . How did securitization help create the subprime mortgage crisis? What changes should be made to the process now? Student Response : Asset securitization resulted in huge losses when the underlying assets were not paid as promised. Sample Correct Answer Answer: Securitization did two things. It allowed mortgage originators to create more mortgage credit than they would have otherwise. This made the size of the problem much greater when it occurred. Second, a significant moral hazard problem emerged. Because originators did not provide the ultimate financing, but quickly sold the mortgages, originators granted mortgages to large numbers of less than creditworthy customers. Part of the reason for this was that the long run up in home prices caused lenders to underestimate the riskiness of the mortgage and housing markets. Securitization has net benefits to homeowners and our economy and it should not be prohibited, but it makes sense to ensure that originators apply reasonable credit standards when granting mortgages.