Interest Rates & Economic Factors Flashcards
7 cards from real CMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Interest Rates & Economic Factors flashcards as text
A borrower's 7/1 ARM has a rate cap structure of 2/2/5. What does the '5' represent?
Answer: The lifetime cap—the maximum the rate can ever increase over the start rate
In a 2/2/5 cap structure, the final number is the lifetime cap, meaning the rate can never rise more than 5 percentage points above the initial start rate.
Which factor most directly causes the 'flight to quality' phenomenon that lowers Treasury yields during economic crises?
Answer: Investors selling riskier assets and buying safe Treasury bonds, increasing demand
During crises, investors rush into US Treasuries as a safe haven, increasing bond prices and driving yields down, which can also push mortgage rates lower.
What is the 'real interest rate' and how is it calculated?
Answer: The nominal interest rate minus the expected inflation rate
The real interest rate is the nominal rate adjusted for inflation (nominal rate minus inflation rate), representing the true cost of borrowing in purchasing-power terms.
How does a widening credit spread between Treasuries and MBS typically affect mortgage rates?
Answer: Mortgage rates rise because investors demand higher yields relative to Treasuries
A widening MBS-Treasury spread means investors require more yield above the risk-free rate to hold MBS, which translates directly to higher mortgage rates for borrowers.
Which best describes the effect of prepayment risk on mortgage-backed securities pricing?
Answer: Higher prepayment risk lowers MBS prices because investors lose expected interest income
When borrowers prepay, investors lose future interest income and must reinvest at potentially lower rates, so higher prepayment risk reduces what investors will pay for MBS.
A borrower locked a 6.75% rate for 30 days. Rates rise to 7.25% before closing. What is the borrower's exposure?
Answer: The borrower is fully protected and closes at 6.75% if within the lock period
A valid rate lock guarantees the quoted rate for the lock period regardless of market movement, protecting the borrower from the rate increase.
Which of the following best explains why housing starts often decline when the Federal Reserve raises rates aggressively?
Answer: Higher mortgage rates reduce buyer purchasing power and housing demand, making new construction less viable
Rising mortgage rates shrink the pool of qualified buyers and reduce affordability, lowering demand for new homes and making new residential construction financially riskier for builders.