FIN 455 CHAPTER 20 EXAM QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026
One way in which a mortgage pay-through bond (MPTB) is similar to a mortgage-backed
bond (MBB) is that the pay-through bond is a debt obligation of the issuer. - Answers True
The CMO is a considered a marketing innovation as well as a financial innovation, because
the different it is the first security in the secondary mortgage market to have run a primetime
television ad. - Answers False
A derivative security derives its value from another security, index, or financial claim - Answers True
Investors retain prepayment risk on MBBs, but issuers incur this risk with MPTs. - Answers False
A floater is a CMO tranche that has a variable interest rate - Answers True
The issuer of a mortgage pass-through bond bears all of the prepayment risk of the
underlying mortgages. - Answers False
The CMO investor assumes the prepayment risk of the underlying mortgages, although the
CMO modifies how the risk is allocated. - Answers True
In comparison to mortgage pass-though securities, CMOs attract a broader class of
investors because, by prioritizing cash flows, they can offer more specific maturities. - Answers True
A CMO does not completely eliminate prepayment risk. - Answers True
If a premium is paid on a CMO issue (at the time of issue), yields will increase as
prepayment rates accelerate. - Answers False
From the issuer's perspective, the use of MBBs and MPTBs should be viewed as a method
of debt financing. - Answers True
Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs. - Answers
False
CMO investors only pay taxes on interest income. - Answers True
In CMO terminology, planned amortization classes (PACs) are also known as companion
tranches - Answers False
CDOs often include "B" notes, mezzanine debt and preferred equity as investments. - Answers True
. CDO managers raises capital through the issuance of rated CDO debt and equity to
purchase an undiversified pool of credit instruments. - Answers False
In CDOs both equity and debt holder prefer riskier, higher-yielding collateral to collect
excess spreads. - Answers False
What is the primary distinction between mortgage-related securities backed by residential
mortgages and those backed by commercial mortgages?
(A) Default is the key risk with residential mortgages; prepayment is the key risk with
commercial mortgages
(B) Interest rate risk is the key risk with residential mortgages; prepayment is the key risk
with commercial mortgages
(C) Prepayment is the key risk with residential mortgages; default is the key risk with
commercial mortgages
(D) Prepayment is the key risk with residential mortgages; interest rate risk is the key risk
with commercial mortgages
(E) There are no significant distinctions - Answers (C)
Tranche Principal Coupon Rate
A $40,000,000 9.25%
B 30,000,000 10.00%
Z 30,000,000 11.00%
19. A mortgage company is issuing a CMO with three tranches, with the principal and coupon
rate given in the table above. What will be the weighted average coupon on the CMO when
issued?
(A) 9.25%
(B) 10.00%
(C) 10.08%
(D) 11.00% - Answers (B)
Which of the following statements regarding subprime mortgages is TRUE?
(A) Subprime mortgages are not Ginnie Mae guaranteed, so CMO investors are exposed to
default risk
(B) Subprime mortgages are not Ginnie Mae guaranteed, so securities backed by subprime
One way in which a mortgage pay-through bond (MPTB) is similar to a mortgage-backed
bond (MBB) is that the pay-through bond is a debt obligation of the issuer. - Answers True
The CMO is a considered a marketing innovation as well as a financial innovation, because
the different it is the first security in the secondary mortgage market to have run a primetime
television ad. - Answers False
A derivative security derives its value from another security, index, or financial claim - Answers True
Investors retain prepayment risk on MBBs, but issuers incur this risk with MPTs. - Answers False
A floater is a CMO tranche that has a variable interest rate - Answers True
The issuer of a mortgage pass-through bond bears all of the prepayment risk of the
underlying mortgages. - Answers False
The CMO investor assumes the prepayment risk of the underlying mortgages, although the
CMO modifies how the risk is allocated. - Answers True
In comparison to mortgage pass-though securities, CMOs attract a broader class of
investors because, by prioritizing cash flows, they can offer more specific maturities. - Answers True
A CMO does not completely eliminate prepayment risk. - Answers True
If a premium is paid on a CMO issue (at the time of issue), yields will increase as
prepayment rates accelerate. - Answers False
From the issuer's perspective, the use of MBBs and MPTBs should be viewed as a method
of debt financing. - Answers True
Cash flows remaining after all CMO tranches have been paid off are referred to as REMICs. - Answers
False
CMO investors only pay taxes on interest income. - Answers True
In CMO terminology, planned amortization classes (PACs) are also known as companion
tranches - Answers False
CDOs often include "B" notes, mezzanine debt and preferred equity as investments. - Answers True
. CDO managers raises capital through the issuance of rated CDO debt and equity to
purchase an undiversified pool of credit instruments. - Answers False
In CDOs both equity and debt holder prefer riskier, higher-yielding collateral to collect
excess spreads. - Answers False
What is the primary distinction between mortgage-related securities backed by residential
mortgages and those backed by commercial mortgages?
(A) Default is the key risk with residential mortgages; prepayment is the key risk with
commercial mortgages
(B) Interest rate risk is the key risk with residential mortgages; prepayment is the key risk
with commercial mortgages
(C) Prepayment is the key risk with residential mortgages; default is the key risk with
commercial mortgages
(D) Prepayment is the key risk with residential mortgages; interest rate risk is the key risk
with commercial mortgages
(E) There are no significant distinctions - Answers (C)
Tranche Principal Coupon Rate
A $40,000,000 9.25%
B 30,000,000 10.00%
Z 30,000,000 11.00%
19. A mortgage company is issuing a CMO with three tranches, with the principal and coupon
rate given in the table above. What will be the weighted average coupon on the CMO when
issued?
(A) 9.25%
(B) 10.00%
(C) 10.08%
(D) 11.00% - Answers (B)
Which of the following statements regarding subprime mortgages is TRUE?
(A) Subprime mortgages are not Ginnie Mae guaranteed, so CMO investors are exposed to
default risk
(B) Subprime mortgages are not Ginnie Mae guaranteed, so securities backed by subprime
