Chapter 07 - Mortgage Markets

7-1


Multiple Choice Questions

9. Rank the following types of mortgages by amount outstanding from largest to
smallest.

I. Home mortgages
II. Multifamily mortgages
III. Farm mortgages
IV. Commercial mortgages
A. I, II, III, IV
B. I, II, IV, III
C. II, I, IV, III
D. IV, II, III, I
E. I, IV, II, III

10. The process of packaging and/or selling mortgages which are then used to back
publicly traded debt securities is called
A. collateralization
B. securitization
C. market capitalization
D. stock diversification
E. mortgage globalization


11. A ___________ placed against mortgaged property ensures that the property cannot
be sold (except by the lender) until the mortgage is paid off.
A. collateral
B. lien
C. writ of habeas corpus
D. down payment
E. writ of certiorari


12. If a borrower makes a 20% down payment on a conventional mortgage they will
be required to obtain
A. FHA insurance
B. VA insurance
C. private mortgage insurance
D. GNMA payment guarantees
E. none of the above

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13. Mortgage payments are ____________ on a 15-year fixed-rate mortgage than on a
30-year fixed-rate mortgage, and ____________ is paid on a 15-year mortgage than on a
30-year mortgage; ceteris paribus.
A. lower; less interest
B. lower; less principle
C. higher; less interest
D. higher; more principle
E. higher; more interest
14. With a fixed-rate mortgage, the ____________ bears the interest rate risk and with
an ARM the ______________ bears the interest rate risk.
A. borrower; lender
B. borrower; borrower
C. lender; lender
D. lender; borrower
E. federal government; pool organizer


15. The schedule showing how monthly mortgage payments are split into principle
and interest is called a(n)
A. securitization schedule
B. balloon payment schedule
C. graduated payment schedule
D. amortization schedule
E. growing equity schedule

16. You purchase a $255,000 house and you pay 20% down. You obtain a fixed-rate
mortgage where the annual interest rate is 5.85% and there are 360 monthly
payments. What is the monthly payment?
A. $1,215.27
B. $1,203.48
C. $1,194.45
D. $1,367.22
E. $1,504.35
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0.80*$255,000 = Pmt PVIFA (0.0585/12, 360 months); Pmt = 1,203.48
17. You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is
6.25%. In addition to the principle and interest paid, you must pay $275 a month
into an escrow account for insurance and taxes. What is the total monthly payment
(to the nearest dollar)?
A. $2,272
B. $1,632
C. $2,547
D. $1,907
E. $2,311
265,000 = [Pmt PVIFA (0.0625/12, 180 months)] + 275 = 2,547
18. You purchase a $325,000 town home and you pay 25% down. You obtain a 30-
year fixed-rate mortgage with an annual interest rate of 5.75%. After 5 years you
refinance the mortgage for 25 years at a 5.1% annual interest rate. After you
refinance, what is the new monthly payment (to the nearest dollar)?
A. $1,422
B. $1,401
C. $1,366
D. $1,335
E. $1,296
0.75 * $325,000 = Pmt PVIFA (0.0575/12, 360 months); Balance after 5 years =
226,107.8; New Pmt = 226,107.8/PVIFA (0.051/12,300) = 1,335.01
19. A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2%
annual rate. After five years, he wishes to pay off the remaining balance. Interest
rates have by then fallen to 7%. How much must he pay to retire the mortgage (to
the nearest dollar)?
A. $2,122,426
B. $2,225,330
C. $2,015,678
D. $2,212,041
E. $1,999,998
$2,250,000 = Pmt PVIFA (0.072/12, 360 months); Pmt = $15,272.73; New Balance
= $15,272.73 PVIFA (0.072/12, 300 months) = 2,122,425.62
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20. A homebuyer bought a house for $245,000. The buyer paid 20% down but
decided to finance closing costs of 3% of the mortgage amount. If the borrower took
out a 30-year fixed-rate mortgage at a 5% annual interest rate, how much interest
will the borrower pay over the life of the mortgage?
A. $224,655
B. $180,622
C. $228,477
D. $188,265
E. $248,575
0.80 * 245,000 * 1.03 = Pmt PVIFA (0.05/12, 360 months); Pmt = 1,083.74; Total
interest = (360 * 1,083.74) - (0.80 * 245,000 * 1.03) = 188,265

21. A homeowner could take out a 15-year mortgage at a 5.5% annual rate on a
$195,000 mortgage amount, or she could finance the purchase with a 30-year
mortgage at a 6.1% annual rate. How much total interest over the entire mortgage
period could she save by financing her home with the 15-year mortgage (to the
nearest dollar)?
A. $230,408
B. $190,105
C. $155,612
D. $144,325
E. $138,612
195,000 = Pmt PVIFA (0.055/12, 180 months); Pmt of 1,593.31 180 = 91,796;
195,000 = Pmt PVIFA (0.061/12, 360 months); Pmt of 1,181.69 360 = 230,408;
230,408 - 91,796 = 138,612


22. If you will keep the mortgage for 30 years, what is the net present value of
paying the points (to the nearest dollar)?
A. $9,475
B. $8,360
C. $7,564
D. $7,222
E. $6,578
No Points: Pmt = $250,000/PVIFA (0.06/12, 360 months); Pmt = 1,498.88; Pay
Points: Pmt = $250,000/PVIFA (0.055/12, 360 months); Pmt = 1,419.47; Pmt
savings = 1,498.88 - 1,419.47 = 79.40; NPV of points: [79.40 PVIFA (0.055/12, 360
months)] - (0.0225 250,000) = 8,360


Chapter 07 - Mortgage Markets
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23. How long must the owner stay in the house to make it worthwhile to pay the
points if the payment saving is invested monthly?
A. 7.15 years
B. 3.33 years
C. 6.04 years
D. 5.90 years
E. More than 30 years
$5,625 points cost = $79.40 payment savings PVIFA (0.055/12, N); N = 85.85
months/12 = 7.15 years
Refer To: 07-22


24. How long must the owner stay in the house to make it worthwhile to pay the
points if the payment saving is not invested?
A. 7.15 years
B. 3.33 years
C. 6.04 years
D. 5.90 years
E. More than 30 years
$5,625 points cost/79.40 payment savings = N = 70.84 months/12 = 5.90 years
Refer To: 07-22

25. The least used form of mortgage securitization is the ______________________.
A. second mortgage
B. mortgage-backed bond
C. mortgage pass-through
D. CMO
E. home equity loan
26. You want to buy a $250,000 house and you will use a conventional mortgage.
What is the minimum down payment you have to make to avoid having to purchase
mortgage insurance?
A. $10,000
B. $20,000
C. $30,000
D. $40,000
E. $50,000



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27. The FHA charges the homeowner __________________ to insure an FHA mortgage.
A. nothing
B. 0.5% of the loan amount
C. $500
D. 1% of the loan amount
E. $1,500
28. A(n) ___________________ is used to help retired people receive monthly income in
exchange for the equity in their home.
A. SAM
B. Equity Participation Mortgage
C. RAM
D. PLAM
E. GEM


29. Which of the following statements about mortgage markets is/are true?

I. Mortgage companies service more mortgages than they originate.
II. Servicing fees typically range from 2% to 4%.
III. Most mortgage sales are with recourse.
IV. The government is involved in the residential mortgage markets.
A. I, III, and IV only
B. II, III, and IV only
C. I, II, and IV only
D. II and III only
E. I and IV only


30. Which of the following statements about GNMA is/are true?

I. GNMA provides timing insurance.
II. GNMA creates pools of mortgages and issues securities.
III. GNMA insures only FHA, VA, and FmHA loans.
IV. GNMA requires that all mortgages in the pool have the same interest rate.
A. I, II, III, and IV are true
B. I, III, and IV only
C. I, II, and III only
D. II, III, and IV only
E. III and IV only


Chapter 07 - Mortgage Markets
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31. A $25,000 face value GNMA pass-through quote sheet lists a spread to average
life of 103, PSA of 220, and a price of 101-09. This means that

I. the pass-through yield is 103 basis points above the comparable maturity
Treasury bond.
II. the pass-through is being prepaid more quickly than standard PSA.
III. the pass-through is priced at $25,272.50.
A. I, II, and III are correct
B. I and II only
C. I and III only
D. II and III only
E. III only


32. Mortgage fees paid by the homeowner at, or prior to, closing upon the purchase
of a house typically include all but which one of the following?
A. Application fee
B. Title search fee
C. Title insurance fee
D. Appraisal fee
E. Prepayment penalty


33. An MBB differs from a CMO or a pass-through in that

I. the MBB does not result in the removal of mortgages from the balance sheet.
II. a MBB holder has no prepayment risk.
III. cash flows on a MBB are not directly passed through from mortgages.
A. I, II, and III
B. I and II only
C. II and III only
D. I and III only
E. I only


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34. One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has
150 PSA. The pool with the higher PSA ______________________ than the pool with the
lower PSA.

I. probably has a higher coupon
II. probably has lower default risk
III. will mature more quickly
A. I, II, and III
B. I and II only
C. II and III only
D. I and III only
E. I only

35. As compared to fixed-rate mortgages, ARMs result in which of the following for
the lender?

I. Higher interest rate risk
II. Lower default risk
III. Greater prepayment penalty fees
A. I, II, and III
B. I and II only
C. II and III only
D. I and III only
E. None of the above



36. Which one of the following types of mortgages is likely to become more popular
as the average age of the U.S. population increases?
A. GEM
B. GPM
C. SAM
D. PLA
E. RAM

37. Which one of the following entities is an actual government agency dealing with
mortgages?
A. GNMA
B. FNMA
C. FHLMC
D. PIP
E. CM
Chapter 07 - Mortgage Markets
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Multiple Choice Questions

15. You buy a stock for $34 per share and sell it for $36 after you collect a $1.00 per
share dividend. Your pre-tax capital gain yield is ________________ and your pre-tax
dividend yield is ________________.
A. 2.94%; 2.78%
B. 8.82%; 0.00%
C. 5.88%; 2.94%
D. 5.56%; 2.78%
E. 4.65%; 3.17%

16. Common stocks typically have which of the following that bonds do not have?

I. Voting rights
II. Fixed cash flows
III. Set maturity date
IV. Tax deductibility of cash flows to investors
A. I only
B. I, II, and IV only
C. II, III, and IV only
D. IV only
E. I, II, III, and IV

17. You buy a stock for $30 per share and sell it for $33 after holding it for slightly
over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate
is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is
___________________.
A. 8.00%
B. 10.25%
C. 12.50%
D. 9.80%
E. 8.75%
[((33 - 30) (1 - 0.20)) + (0.75 (1 - 0.28))]/30 = 2.94/30 = 9.8%


Chapter 07 - Mortgage Markets
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18. An investor has a 38% ordinary income tax rate and a 20% long-term capital
gains tax rate. The investor holds stock in a firm that could pay its usual $1 per
share dividend or reinvest the cash in the firm. The stock price is currently $30 per
share. If the firm does not pay the dividend, the share price will rise. If it pays the
dividend, the share price will stay the same. By how much must the share price rise
if the dividend is not paid in order to make the investor indifferent between
receiving the dividend or not?
A. $1.00
B. $0.59
C. $0.78
D. $0.97
E. $0.50
Change in share price required = [1 * (1 - 0.38)]/(1 - (0.20) = $0.78
19. With ____________ voting, all directors up for election are voted on by the
shareholders at the same time in one general election.
A. straight
B. participating
C. nonparticipating
D. proxy
E. cumulative

20. If all preferred dividend payments that have been missed must be paid before
any common stock dividend can be paid the preferred stock is called _____________
preferred stock.
A. cumulative
B. participating
C. nonparticipating
D. voting
E. dual class



21. In 2007 the NYSE merged with _________________.
A. Nasdaq
B. Euronext
C. American Exchange
D. Chicago Mercantile Exchange
E. London Stock Exchange


Chapter 07 - Mortgage Markets
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22. If the net proceeds are greater than the gross proceeds in an underwritten
offering, then
A. the investment banker made a profit on the spread.
B. the issuing company underpriced its securities.
C. the issue fails to occur.
D. the SEC rescinds the issue.
E. none of the above


23. The preemptive right is designed to
A. allow management to diffuse stock ownership any voting power.
B. allow managers to preempt a stock offering if they do not like the terms of the
deal.
C. allow existing shareholders the right to sell their existing shares before the new
offer.
D. allow existing shareholders to buy shares of the new offering if they desire.
E. none of the above

24. The NASDAQ automatic order execution system for individual traders placing
buy or sell orders of 1000 or fewer shares is called the
A. ECN Network
B. SOE System
C. NASDAQ/AMEX Joint Program
D. Instinet Network
E. E*Trade Online Program


25. The preliminary version of a security offer that is circulated to potential buyers
before SEC approval (registration) is obtained is called a
A. final prospectus
B. shelf registration statement
C. due diligence draft
D. waiting period offer
E. red herring prospectus



Chapter 07 - Mortgage Markets
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26. A shelf registration allows firms the opportunity to avoid the normal
______________ day waiting period by allowing preregistration of securities for up to
______________ years.
A. 20-; 2
B. 10-; 1
C. 15-; 3
D. 20-; 1
E. 30-; 2


27. Which of the following is/are true about specialists?

I. Investment banks generally cannot be specialists
II. Specialists are used by the NASDAQ system
III. Market and limit orders are transacted at specialist posts, but the specialist's
own account orders are executed elsewhere
IV. Specialists help maintain continuous trading
A. I, II, and III only
B. I and IV only
C. II, III, and IV only
D. I only
E. III only

28. As of December 2005, trading licenses are required to conduct trades on the
floor of the NYSE. Which of the following statements about these trading licenses
is/are correct?

I. Licenses are auctioned off in a special type of auction called a Dutch auction.
II. The NYSE determines the minimum bid price.
III. The SEC determines the maximum bid price.
IV. Trading licenses are good for 10 years.
A. II and III only
B. I and II only
C. I and III only
D. II and IV only
E. I, II, III, and IV
Chapter 07 - Mortgage Markets
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29. Which of the following information is NOT usually found in a Wall Street Journal
stock quote?
A. Dividend yield
B. Price-earnings ratio
C. Closing price of the stock
D. Stock rating
E. Ticker symbol
30. In terms of volume of trading and market value of firms traded, the _____________
is the largest U.S. stock market. In terms of number of firms traded, the ___________ is
the largest in the United States.
A. NYSE; NYSE
B. NASDAQ; NYSE
C. NYSE; AMEX
D. NYSE; NASDAQ
E. NASDAQ; AMEX

31. On the NASDAQ system, the inside quotes are the
A. lowest ask and lowest bid.
B. lowest bid and highest ask.
C. highest bid and highest ask.
D. highest bid and lowest ask.
E. none of the above

32. NYSE listing has traditionally benefited a firm by
A. improving the stock's price.
B. generating increased publicity for the firm.
C. providing easier access to primary market capital.
D. B and C only
E. A, B, and C

33. Which of the following indices are value-weighted?

I. NYSE Composite
II. S&P500
III. NASDAQ Composite
IV. Dow Jones Industrial Average
A. I, II, III, and IV
B. I only
C. II only
D. II, III, and IV only
E. I, II, and III only



Chapter 07 - Mortgage Markets
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34. The largest single type of holder of common stock ($) is
A. pension funds
B. households
C. mutual funds
D. brokers and dealers
E. life insurance firms
35. A firm is using cumulative voting and four director spots are up for election.
There are 3.6 million shares outstanding. How many shares must a minority owner
own or control to ensure that he or she can gain control of one seat on the board of
directors?
A. 900,001
B. 880,001
C. 720,001
D. 1,800,001
E. 1,750,001
[((1/(4 + 1)) * 3.6 million] + 1

36. Today Stock A is worth $20 and has 1000 shares outstanding. Stock B costs $30
and has 500 shares outstanding. Stock C is priced at $50 per share and has 1200
shares outstanding. If tomorrow Stock A is priced at $22, Stock B at $35, and Stock C
is worth $48, what would the value-weighted index amount equal? (The index has a
base period value of 100.)
A. 35.00
B. 105.00
C. 108.44
D. 101.45
E. 102.21



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37. Suppose that over the last 10 to 15 years significantly large numbers of investors
have been able to earn abnormal returns from using the firm's publicly available
financial information to forecast growth in earnings and dividends. This would be
evidence that the markets are not:

I. weak form efficient
II. semi-strong form efficient
III. strong form efficient
A. I only
B. I and II only
C. III only
D. II and III only
E. I, II, and III

38. In a ____________ offering the firm preregisters with SEC any securities it wishes to
sell over the next two years.
A. rights
B. full underwritten
C. general cash
D. shelf
E. best efforts

39. The stamp on a prospectus accompanying a new issue that indicates the issue
has not yet been approved for sale by the SEC is called the
A. green hornet
B. seal of approval
C. red herring
D. eagle stamp
E. Regd FD


40. The NYSE specialists are charged with

I. trading for their own account.
II. ensuring public limit orders are executed.
III. facilitating processing public market orders.
A. I only
B. I and II only
C. II and III only
D. I and III only
E. I, II, and III



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41. The age group that holds the most stock is the ____________ group.
A. under 35
B. 35-44
C. 45-64
D. 65 and older

42. The electronic-based market for less actively traded U.S. securities is the
A. ADR market
B. OTC Bulletin Board
C. Pink Sheet stocks
D. NYSE Low Volume Market
E. ECN Market


43. Computerized markets that automatically match orders between buyers and
sellers and are used primarily by institutions traders are called
A. OTC bulletin boards
B. SPIDRS
C. Index Markets
D. ECNs
E. Specialists


44. Ethanol Lawn Mowers issued 500,000 shares to the public. The gross proceeds
were $31,250,000 and the net proceeds were $30 million. Merrel Bench was the
lead underwriter and deal negotiator, but 10 other investment bankers (one of
which was Golden Sax) were also used to put up capital and help sell the issue.
Which of the following statements is/are correct?

I. The public paid $62.50 a share.
II. Golden Sax was the originating house.
III. The spread per share was $3.50.
IV. Merrel Bench is the sole book running manager.
V. This offer was a syndicated deal.
A. I, II, and IV only
B. III and V only
C. I, IV, and V only
D. II and III only
E. I and V only





Chapter 07 - Mortgage Markets
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