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Mortgage-Backed Securities Quiz

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Questions and Answers

What risk do MBS investors face when prepayments are delayed?

Liquidity risk

Credit risk

Prepayment penalty risk

Extension risk (correct)

What is the main factor that affects the speed of mortgage prepayments?

Interest rate environment (correct)

Economic conditions

Borrower’s credit score

Property location

What is a key effect of decreasing interest rates on MBS prices?

Prices increase without limitations

Prices rise slowly due to embedded prepayment options (correct)

Prices decrease due to a lack of refinancing activity

Prices stabilize and do not change

What does time tranching in MBS structures aim to achieve?

Redistribute contraction and extension risks Signup and view all the answers

Which type of loans are characterized by low loan-to-value (LTV) and debt-to-income (DTI) ratios in the US?

Prime loans Signup and view all the answers

What does the weighted-average life (WAL) of a mortgage-backed security (MBS) represent?

The time-weighted average of expected cash flows Signup and view all the answers

How does negative convexity affect the price-yield relationship of mortgage-backed securities (MBSs)?

MBS prices rise less than expected as yields fall Signup and view all the answers

Which type of prepayment model assumes that prepayment rates increase with loan age and then level off?

PSA prepayment model Signup and view all the answers

What does the Conditional Prepayment Rate (CPR) measure in mortgage-backed securities (MBSs)?

Annualized percentage of the remaining loan pool prepaid Signup and view all the answers

What is the primary benefit of investing in agency RMBS?

Guarantee of principal and interest payments by a GSE Signup and view all the answers