CMA Mortgage-Backed Securities Overview 3

Question 1

What does the PSA prepayment model assume about prepayment speeds in the first 30 months of a mortgage pool?

Accepted Answer

Prepayments ramp up from 0% CPR to 6% CPR linearly

Answer

The PSA standard model assumes prepayments ramp up at 0.2% CPR per month for 30 months until reaching 6% CPR, then remain constant.

Question 2

Which type of MBS pools only adjustable-rate mortgages?

Accepted Answer

ARM MBS

Answer

ARM MBS (Adjustable-Rate MBS) are securitizations backed exclusively by adjustable-rate mortgage loans.

Question 3

In the TBA (To-Be-Announced) market, what is typically settled on trade settlement date?

Accepted Answer

The specific pool identifiers, face value, and price

Answer

At TBA settlement, the seller announces the specific pool(s) — including CUSIP, face value, and price — that will be delivered to fulfill the forward trade.

Question 4

What is the effect of negative convexity on an MBS investment when interest rates fall sharply?

Accepted Answer

Price increases less than expected due to prepayments

Answer

Negative convexity causes MBS prices to lag Treasury price gains when rates fall sharply, because accelerating prepayments cap the upside.

Question 5

Which CMO tranche receives no periodic interest payments but is sold at a deep discount and accretes to par?

Accepted Answer

Z-tranche (accrual bond)

Answer

The Z-tranche accrues interest that is added to principal balance until all preceding tranches are retired, then receives full cash flows.

(CMA) Certified Mortgage Advisor Practice Test

(CMA) Certified Mortgage Advisor Practice Test

CMA Mortgage-Backed Securities Overview 3