MORTGAGE-BACKED SECURITIES: KEY TERMS AND MARKET MECHANICS UPDATED ACTUAL QUESTIONS AND CORRECT ANSWERS

MORTGAGE-BACKED SECURITIES: KEY TERMS AND
MARKET MECHANICS UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS

Question:
1. Bids Wanted In Competition — a seller's auction list of bonds sent to dealers; the core mechanism of
secondary trading in non-agency RMBS
Answer:
BWIC

Question:
2. Post-trade price information circulated after an auction; the market's main form of price discovery
Answer:
Color

Question:
3. The second-best bid in an auction; tells the winner whether they priced well or overpaid
Answer:
Cover

Question:
4. A position a dealer is actively motivated to buy or sell ("axed to sell 5mm")
Answer:
Axe

Question:
5. Did Not Trade — no bid on the auction met the seller's reserve price
Answer:
DNT

Question:
6. The fraction of original principal still outstanding; current face = original face × factor, and trades settle
on current face
Answer:
Factor / current face

Question:
7. Bond prices quoted in 32nds — "98-16" means 98 and 16/32, i.e. 98.50
Answer:
Ticks

Question:
8. Constant Prepayment Rate — the annualized rate at which borrowers voluntarily pay off loans early
(refi or home sale)