CMB Advanced Portfolio Management 2

Question 1

A portfolio manager notices that a pool of fixed-rate mortgages extends in average life when rates rise. What is this risk called?

Accepted Answer

Extension risk

Answer

Extension risk occurs when rising rates slow prepayments and lengthen the expected life of mortgage assets.

Question 2

Why do mortgage-backed securities typically exhibit negative convexity?

Accepted Answer

Borrowers' prepayment option shortens duration as rates fall

Answer

The embedded prepayment option caps price appreciation when rates fall, producing negative convexity.

Question 3

A 100% PSA prepayment assumption implies what annualized CPR once the pool reaches month 30?

Accepted Answer

6%

Answer

The PSA benchmark ramps 0.2% CPR per month to a constant 6% CPR at month 30 and thereafter.

Question 4

Which metric best captures the price sensitivity of a mortgage asset after accounting for changing cash flows from prepayments?

Accepted Answer

Effective duration

Answer

Effective duration uses option-adjusted pricing under rate shocks, capturing prepayment-driven cash-flow changes.

Question 5

A lender holds a large concentration of loans in a single metropolitan area. Which risk is most directly elevated?

Accepted Answer

Geographic concentration credit risk

Answer

Concentration in one market exposes the portfolio to correlated defaults from a local economic or price shock.

CMB - Certified Mortgage Banker Practice Test