CFA Level 2 - Fixed Income Session 15 - Reading 57 Mortgage-Backed Sector of the Bond Market-LOS k

CFA Level 2 – Fixed Income, Session 15-Reading 57

Mortgage-Backed Sector of the Bond Market-LOS k

(Notes, Practice Questions, Sample Questions)

1. All of the following statements regarding nonagency securities are correct EXCEPT:

A) the collateral behind nonagency CMOs is a pool of loans.

B) the collateral behind nonagency collateralized mortgage obligations is passthrough securities.

C) loans used to back nonagency CMOs are referred to as nonconforming loans

<Explanation> B — The collateral behind nonagency CMOs is a pool of loans, not passthrough securities

2. Which of the following statements is least accurate concerning nonagency mortgage-backed securities (MBS)?

A) They are usually backed with “conforming” mortgage loans.

B) They usually require credit enhancement.

C) They are issued by private entities

<Explanation> A — Nonagency MBS are usually backed by “nonconforming” mortgages, such as those that do not meet the underwriting standards of the agencies

3. Which of the following is a difference between agency and nonagency mortgage-backed securities (MBS)? Nonagency MBS:

A) have floating mortgage rates.

B) can only be for commercial real estate property.

C) can be for any type of real estate property

<Explanation> C — For agency MBS the underlying mortgages are one to four-single family residential mortgages only. Nonagency securities exist that are backed by second mortgage loans, manufactured housing loans, and a variety of commercial real estate loans, in addition to single family residential mortgages