336 Chapter 9 Mortgage Markets Chapter 9 Mortgage Markets 1 Federally insured mortgages guarantee A loan repayment to the lending financial institution B that the interest rate will not increase during the life of the mortgage C the lending financial institution a selling price for the mortgage in the secondary market D all of these ANSWER A 2 At a given point in time the interest rate offered on a new fixed rate mortgage is typically the initial interest rate offered on a new adjustable rate mortgage A below B above C equal to D none of these ANSWER B 3 An institution that originates and holds a fixed rate mortgage is adversely affected by interest rates the borrower who was provided the mortgage is adversely affected by interest rates A stable decreasing B increasing stable C increasing decreasing D decreasing increasing ANSWER C 4 Rates for adjustable rate mortgages are commonly tied to the A average prime rate over the previous year B Fed s discount rate over the previous year C average Treasury bill rate over the previous year D average Treasury bond rate over the previous year ANSWER C 5 Caps on mortgage rate fluctuations with adjustable rate mortgages ARMs are typically percent per year and percent for the mortgage lifetime A 2 5 B 5 15 C 0 10 D 3 8 ANSWER A 337 Chapter 9 Mortgage Markets 6 From the perspective of the lending financial institution interest rate risk is A lower on a 30 year fixed rate mortgage than on a 15 year fixed rate mortgage B lower on a 15 year fixed rate mortgage than on a 30 year fixed rate mortgage C higher on a 15 year fixed rate mortgage than on a 30 year fixed rate mortgage D higher on a 15 year adjustable rate mortgage than on a 30 year adjustable rate mortgage ANSWER B 7 Mortgage companies specialize in A purchasing mortgages originated by other financial institutions B investing and maintaining mortgages that they create C originating mortgages and selling those mortgages D borrowing money through the creation of mortgages that is used to invest in real estate ANSWER C 8 For any given interest rate the shorter the life of the mortgage the the monthly payment and the the total payments over the life of the mortgage A greater greater B greater less C less greater D less less ANSWER B 9 A financial institution has a higher degree of interest rate risk on a than a A 30 year fixed rate mortgage 15 year fixed rate mortgage B 30 year variable rate mortgage 30 year fixed rate mortgage C 15 year fixed rate mortgage 30 year fixed rate mortgage D 15 year variable rate mortgage 15 year fixed rate mortgage ANSWER A 10 Use an amortization schedule A 15 year 100 000 mortgage has a fixed mortgage rate of 9 percent In the first month the total mortgage payment is and of this amount represents payment of interest A 1 014 264 B 1 241 750 C 1 014 750 D none of these ANSWER C Chapter 9 Mortgage Markets 338 11 A mortgage which requires interest payments for a three to five year period then full payment of principal is a n A chattel mortgage B balloon payment mortgage C variable rate mortgage D open ended mortgage bond ANSWER B 12 In an amortization schedule of monthly mortgage payments A the amount of interest in each payment is equal to the principal paid B interest payments exceed principal payments early on C principal payments exceed interest payments early on D none of these ANSWER B 13 A mortgage with low initial payments that increase over time without ever leveling off is a mortgage A graduated payment B growing equity C second D shared appreciation ANSWER B 14 The interest rate on a second mortgage is a first mortgage created at the same time because the second mortgage is the existing first mortgage in priority claim against the property in the event of default A higher than behind B equal to equal to C lower than ahead of D higher than ahead of E lower than behind ANSWER A 15 Which of the following mortgages allows the home purchaser to obtain a mortgage at a below market interest rate throughout the life of the mortgage A second mortgage B growing equity mortgage C graduated payment mortgage D shared appreciation mortgage ANSWER D 339 Chapter 9 Mortgage Markets 16 A mortgage allows the borrower to initially make small payments on the mortgage The payments then increase over the first 5 to 10 years and then level off A graduated payment B growing equity C second D shared appreciation ANSWER A 17 was created in 1968 as a corporation that is wholly owned by the federal government It supplies funds to low and moderate income homeowners indirectly by facilitating the flow of funds into secondary mortgage markets A Freddie Mac B Ginnie Mae C Fannie Mae D None of these ANSWER B 18 A financial institution that prefers to invest in mortgages for long periods of time or to generate fee income would likely A invest in mortgages B sell mortgages it originated C originate mortgages D do none of these ANSWER C 19 The difference between the 30 year mortgage rate and the 30 year Treasury bond rate is primarily attributable to risk A interest rate B reinvestment rate C credit D insurance ANSWER C 20 Mortgage prices would normally be expected to when the budget deficit holding other factors constant A increase increases B decrease decreases C increase decreases D none of these ANSWER C Chapter 9 Mortgage Markets 340 21 Collateralized mortgage obligations CMOs are generally perceived to have A no interest rate risk but some default risk B the same interest rate risk and no default risk C the same interest rate risk as money market securities D a high degree of interest rate risk ANSWER D 22 The issuance of pass through securities by financial institutions that provide mortgages A can reduce their interest rate risk B increases their interest rate risk C has no effect on their interest rate risk D requires financial institutions to sell mortgages outright in the secondary market ANSWER A 23 The interest rate received by purchasers of the mortgage pass through securities is the interest rate on the mortgages serving as collateral A equal to B slightly less than C much more than D substantially less than ANSWER B 24 Which pass through security is backed by mortgages that are insured through private insurance companies A Ginnie Mae mortgage backed securities B Fannie Mae mortgage backed securities C publicly issued pass through securities PIPs D shared appreciation pass through securities ANSWER C 25 Which of the following is not a guarantor of federally insured mortgages