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1. Which of the following is a source of risk for mortgage lenders?

a. Prepayments

b. Interest rate changes

c. Defaults on mortgage payments

d. all of the above

2. For mortgage loans, what is prepayment risk?

a. The risk that borrowers will pay off the loan faster than expected.

b. The risk that borrowers will pay off the loan slower than expected.

c. The risk that lenders will ask for repayment of the loan faster than expected.

d. The risk thatborrowers will default on their payments.

3. All else equal, which of the following would have the highest risk of default?

a. 30 year fixed rate mortgage with a 103% LTV

b. 30 year fixed rate mortgage with a 90% LTV

c. 15 year fixed rate mortgage with a 103% LTV

d. 15 year fixed rate mortgage with a 90% LTV

4. Use the Bear Sterns housing refinance model (WAC / market mortgage rate) to choose the best answer.

a. If market mortgage rates are going down, then mortgage refinance is likely to decrease

b. If market mortgage rates are going up, then mortgage refinance is likely to increase

c. If WAC > market mortgage rate, then the borrower will get a higher rateif they refinance

d. none of the answer choices are correct

5. A simple mortgage pool consists of the following two mortgages; a $90,000 mortgage at 5% for 15yrs, and a $110,000 mortgage at 6% for 30 yrs. The WAC is _____ %, and the WAM is _____ yrs.

6. Investment in a$100 million mortgage poolcan be divided into two classes: a $90 million senior class and a $10 million subordinated class.If $12million of the pool defaults, investors in the subordinated class will suffer ____% loss, while investors in the senior class will suffer _____% loss.

7. Suppose that an investor owns a pass-through in which the remaining mortgage balance at thebeginning of some month is $99million. Assuming that the SMM is 0.69244% and the scheduled principal payment is $1 million, what is the estimated prepaymentfor the month?

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