are made monthly receives payments after all other tranchesC. This avoids having to pay tax each year on the upwards principal adjustment.). C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class II. holders of "plain vanilla" CMO tranches have higher prepayment risk, Which CMO tranche is most susceptible to interest rate risk? \begin{array}{c} This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Science, 28.10.2019 21:29, nicole8678. Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. D. loan to value ratio. no extension risk. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. Default risk A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. CMOs are often quoted on a yield spread basis to similar maturity: \end{array} There is no such thing as an AAA+ rating; AAA is the highest rating available. If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs A. CMOs are backed by agency pass-through securities held in trustC. When the bills mature, the difference between the purchase price and the redemption value at par is taxable as interest income. b. monthly The certificates are quoted on a yield basis holders of "plain vanilla" CMO tranches have lower prepayment risk Thus, the earlier tranches are retired first. Which statements are TRUE regarding collateralized mortgage obligations? The purchaser of a CMO tranche experiences extension risk during periods when interest rates: A. riseB. These are issued at a deep discount to face. CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations b. they are "packaged" by broker-dealers The note pays interest on Jan 1st and Jul 1st. which statements are true about po tranches. We are not the heroes of the narrative. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. What is the scientific name of apple? Treasury Receipts represent an undivided interest in a portfolio of U.S. Government securities held by a trustee. III. . III. D. have the same prepayment risk as companion classes. A. U.S. Government bonds d. CMOs receive the same credit rating as the underlying pass-through securities held in trust, CMOs are subject to a higher level of prepayment risk than a pass through certificate, Which statements are TRUE about prepayment experience on collateralized mortgage obligations? I. Older CMOs are known as "plain vanilla" CMOs, because the repayment scheme is relatively simple - as payments are received from the underlying mortgages, interest is paid pro-rata to all tranches; but principal repayments are paid sequentially to the first, then second, then third tranche, etc. Thus, when interest rates fall, prepayment risk is increased. All of the following statements are true about CMOs EXCEPT: A. CMO issues have a serial structureB. The Federal Reserve allows commercial banks (such as Citibank and J.P. Morgan Chase); domestic broker-dealers (such as Goldman Sachs); and foreign broker-dealers (such as Daiwa Securities and Nomura Securities); and foreign banks such as Royal Bank of Scotland; to be primary dealers. This is extension risk - the risk that the CMO tranche will have a longer than expected life, during which a lower than market rate of return is earned. A. A PAC offers protection against both prepayment risk (prepayments go to the Companion class first) and extension risk (later than expected payments are applied to the PAC before payments are made to the Companion class). A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. All of the following are true statements regarding Treasury Bills EXCEPT: A. T-Bills are issued in bearer form in the United States B. T-Bills are registered in the owner's name in book entry form C. T-Bills are issued at a discount D. T-Bills are non-callable. When interest rates rise, the price of the tranche rises $81.25 Highland Industries Inc. makes investments in available-for-sale securities. b. treasury bills March 2, 2023 at 12:39 pm #130296. At maturity, the receipt will have an adjusted cost basis of par, and will be redeemed at par, for no capital gain or loss. IV. Interest income is accreted and taxed annually When interest rates rise, the price of the tranche falls The Federal Reserve would permit which of the following to be "primary" U.S. Government securities dealers? Sallie Mae stock is listed and trades, Which of the following issue agency securities? The note pays interest on Jan 1st and Jul 1st. Fannie Mae is a U.S. Government Agency The best answer is C. A PO is a Principal Only tranche. I. Ginnie Mae is a U.S. Government Agency 1 / 39 The best answer is B. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. IV. FNMA pass through certificates are not guaranteed by the U.S. Government, FNMA is a publicly traded corporation A Treasury Bond is quoted at 95-24. What is NOT a risk of investing in a GNMA? III. marketability risk They are used to create tranches with different risk/return characteristics - so a CDO will have higher risk tranches holding lower quality collateral and lower risk tranches holding higher quality collateral. Fannie Mae debt securities are negotiable, When comparing the debt issues of Ginnie Mae to Fannie Mae, which statements are TRUE? Planned Amortization ClassB. I, II, III, IV. There are approximately 20 such firms. CMOs divide the cash flows into tranches of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. All of the following statements are true regarding this trade of T-notes EXCEPT: Thus, the rate of principal repayments varies, depending on market interest rate movements. What is not eliminated, however, is credit risk. b. CDO B. CMBs are sold at a discount to par I. are made monthly I. IV. This pool, with say an average life of 12 years, is chopped-up into many different tranches, each with a given expected life. For example, there may be 10 tranches in the pool, with the first tranche having an expected life of 1-2 years, the second tranche having an expected life of 3-5 years, the third tranche having an expected life of 5-7 years, etc. Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. They are used to create tranches with different risk/return characteristics - so a CDO will have higher risk tranches holding lower quality collateral and lower risk tranches holding higher quality collateral. If the principal amount of a Treasury Inflation Protection Security is adjusted upwards due to inflation, the adjustment amount is: A. not taxableB. Browse over 1 million classes created by top students, professors, publishers, and experts. Options are the most basic derivative - option values are derived from the price movements of the underlying stock, in addition to time premiums on the contracts. b. T-bills are the most actively traded money market instrument When interest rates fall, homeowners do refinance their mortgages, and the prepayment rate will be higher than expected. The market has never recovered. Treasury Bills are not subject to reinvestment risk because they are essentially short term "zero-coupon" obligations. C. Treasury STRIP a. Z-tranche CMOs have a lower level of market risk (risk of price volatility due to movements in market interest rates) than do mortgage backed pass-through certificates. In periods of inflation, the coupon rate remains unchanged An IO is an Interest Only tranche. A PO is a Principal Only tranche. Because they trade, the liquidity risk aspect of structured products is eliminated. D. FNMA bond. Regarding the Student Loan Marketing Association (Sallie Mae) which of the following statements are TRUE? Mortgage backed pass-through certificates are paid off in a shorter time frame than the full life of the underlying mortgages. Since 1 Basis Point = .01% = $.10, 140 Basis Points = 1.40% = $14.00. \text{Unrealized gain (loss) on available-for-sale investments}&&&(16,400)\\ I, II, IVD. A. CMBs are used to smooth out cash flow I. pension funds It is primarily associated as a tranche of a collateralized mortgage obligation (CMO), which also. Interest is paid after all other tranches **e.** Collin v. Smitb, $1978$. Treasury Bills are quoted on a yield basis. Governments. Which statements are TRUE regarding Treasury debt instruments? A. The holder of a specific tranche of a CMO will only receive prepayments after all earlier tranche holders are repaid. $$ step up step down bond I, II, III, IV. Conversely, if the principal amount of a Treasury Inflation Protection Security is adjusted downwards due to deflation, the adjustment is tax deductible in that year against ordinary interest income. Its price moves just like a conventional long term deep discount bond. A PAC offers protection against both prepayment risk (prepayments go to the Companion class first) and extension risk (later than expected payments are applied to the PAC before payments are made to the Companion class). Treasury Receipts, All of the following are true statements about U.S. Government Agency securities EXCEPT: True, the transition to the post-growth era won't be easy for the CCP or the Chinese people if income and wages level off or worsen, and if a declining tax base can't sustain an aging population. c. Office of the Comptroller of Currency C. Agency CMOs take on the credit rating of the underlying agency securities while Private Label CMOs are assigned credit ratings by independent credit ratings agencies b. mortgage backed securities created by a bank-issuerC. CMBs are Cash Management Bills. d. privatized syndicated asset, All of the following statements are true regarding CMOs EXCEPT: Which statements are TRUE about PO tranches? Governments. T-bills are issued at a discount, T-bills are registered in the owner's name in book entry form C. guarantee of the financial institution from which the mortgages were purchased \text { Net income (loss) } & \text { } & (21,000) Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Financial Management, Concise Edition, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield. A. Fannie Mae CertificateB. In periods of deflation, the principal amount received at maturity will decline below par Plain vanilla CMO tranches are subject to both prepayment and extension risks. Thus, the PAC class is given a more certain maturity date; while the Companion class has a higher level of prepayment risk if interest rates fall; and a higher level of so-called extension risk - the risk that the maturity may be longer than expected, if interest rates rise. $.025 per $1,000B. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. The CMO purchaser buys a specific tranche. Ginnie Mae bonds are traded Over the Counter, Ginnie Mae is a U.S. Government Agency II. $81.25 A 70-year old customer who is looking for current income has inquired about purchasing a GNMA pass-through certificate because he has heard that it provides monthly payments. For most investors this is too much money to invest, so they buy shares of a Ginnie Mae mutual fund instead. Tranches onward. Tranches are groups of securities of a firm in which investors invest. are volatile. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. c. the trade will settle in Fed Funds A TAC is a variant of a PAC that has a higher degree of prepayment risk the same level of extension riskD. coupon rate remains at 4% Thus, the PAC is given a more certain repayment date; while the CMO is given the least certain repayment date. Targeted amortization classC. A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. The last 3 statements are true. CMO investors are subject to which of the following risks? For the exam, these securities are still rated AAA. C. Plain Vanilla Tranche IV. Market Value \textbf{Highland Industries Inc.}\\ individual wishing to avoid reinvestment risk, money market funds When the bond matures, the holder receives the higher principal amount. IV. I. Thus, the earlier tranches are retired first. Bank issuers make non-conforming mortgages that cannot be sold to Fannie, Freddie or Ginnie and rather than hold them as investments, they can pool them into mortgage backed securities which are then placed into trust and sold as private label CMOs. D. call risk. The interest income on U.S. Government obligations and most agency obligations is subject to Federal income tax but is exempt from state and local tax. B. A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. All of the statements are true about CMOs. A Targeted Amortization Class (TAC) is like a PAC, but is only buffered for prepayment risk by the Companion; it is not buffered for extension risk. Price volatility of a CMO issue would most closely parallel that of an equivalent maturity: Federal Reserve II. B. mutual fund The PAC tranche is a "Planned Amortization Class." \text{Retained earnings}&\$175,400&\$220,000&\\ III. Treasury Bill A. Often CMO tranches are quoted on a "yield spread" basis to equivalent maturing U.S. Government Agency issues (makes sense since agency issues are the "collateral" for such securities). IV. \end{array} Treasury bill Fannie Mae debt securities are negotiable Thus, the earlier tranches are retired first. Treasury Bonds A PO is a Principal Only tranche. Arrange the following CMO tranches from lowest to highest yield: II rated based on the credit quality of the underlying mortgages. in varying dollar amounts every month CMOs are often quoted on a yield spread basis to similar maturity: Interest received from all of the following securities is exempt from state and local taxes EXCEPT: Which statements are TRUE regarding Treasury STRIPS? A TAC is a variant of a PAC that has a lower degree of prepayment risk State income tax onlyC. The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? When interest rates rise, the price of the tranche falls The interest on these securities is subject to both Federal and State and Local income tax; hence CMOs are taxed in the same manner. If the inflation rate during the first year of the security's life is 5%, the: III. Securities and Exchange Commission 14% ), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. If interest rates rise, then the expected maturity will shorten The Companion, which absorbs these risks first, has the least certain repayment date. Thus, the prepayment rate for CMO holders will increase. A. a dollar price quoted to a 4.90 basis A collateralized mortgage obligation is best defined as a derivative product. Thus, PACs have lower prepayment risk than plain vanilla CMO tranches. Thus, the price movement of that specific tranche, in response to interest rate changes, more closely parallels that of a regular bond with a fixed repayment date. Treasury Notes Which CMO tranche will be offered at the highest yield? D. expected interest rate, The nominal interest rate on a TIPS is: The U.S. Treasury issues 4 week, 13 week, 26 week, and 52 week T-Bills at a discount from par. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. Because CMO issues are divided into tranches, each specific tranche has a more certain repayment date, as compared to owning a mortgage backed pass-through certificate. III. B. expected life of the tranche However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. $$ Collateralized mortgage obligation tranches that are available to the public are generally rated: CMO tranches are generally AAA rated (or have an implied AAA rating because the tranches are backed by GNMA, FNMA or Freddie Mac pass-through certificates). When interest rates rise, the price of the tranche rises C. security which is backed by real property and/or a lien on real estate b. CMOs make payments to holders monthly Interest payments are still made pro-rata to all tranches, but principal repayments that are made earlier than the PAC maturity are made to the Companion classes before being applied to the PAC (this would occur if interest rates drop); while principal repayments made later than anticipated are applied to the PAC maturity before payments are made to the Companion class (this would occur if interest rates rise). c. risks of default if homeowners do not make their mortgage payments Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. If interest rates rise, then the expected maturity will lengthen Ginnie Mae is backed by the guarantee of the U.S. Government, making it the highest credit rated agency security. Do not confuse this with the "average life" of the mortgages in the pool that backs the CMO. Thus, because the PAC has lowered prepayment and extension risk, its yield will be lower than the surrounding Companion classes. TACs are like a one-sided PAC - they protect against prepayment risk, but not against extension risk. CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. Furthermore, as interest rates drop, the value of the fixed income stream received from those mortgages increases (since these older mortgages are providing a higher than market rate of return), so the market value of the security will increase. Users should NOT be allowed to delete review records after job application records have been approved. Which of the following statements are TRUE about PAC tranches PAC tranche holders have lower prepayment risk than companion tranche holders PAC tranche holders have lower extension risk than companion tranche holders If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranches D. When interest rates rise, the interest rate on the tranche rises. Real Estate Investment TrustD. III. Because CMO issues are divided into tranches, each specific tranche has a more certain repayment date, as compared to owning a mortgage backed pass-through certificate. Collateralized mortgage obligations are backed by mortgage pass-through certificates that are held in trust. The CDO innovation was that the tranches were arranged into risk-levels, so lower risk tranches and higher risk tranches were created with the sub-prime collateral. yearly. The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. What is the current yield, disregarding commissions? C. certificates trade "and interest" Accrued interest on the certificates is computed on a 30 day month / 360 day year basis, All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT: Plain vanilla CMO tranches are subject to both prepayment and extension risks. purchasing power risk taxable in that year as interest income receivedC. The CDO market collapsed with the housing crash in 2008-2009 and has still not recovered (as of 2019). Government agency securities are quoted in 32nds, similar to U.S. Government securities. D. Series EE Bonds. coupon rate remains at 4% How much will the customer receive at each interest payment? A new study recently published in BMC Neuroscience indicates that female brains respond differently to pictures of newborn infants as compared to male brains on average. D. Collateral trust certificate, Treasury bond Thus, the price movement of that specific tranche, in response to interest rate changes, more closely parallels that of a regular bond with a fixed repayment date. B. step up step down bond Both securities pay interest at maturity, The physical securities which are the underlying collateral for Treasury Receipts are: This is a tranche that only receives the principal payments from an underlying mortgage, and it is created with a corresponding IO (Interest Only) tranch that only receives the interest payments from that mortgage. Because the principal is being paid back at a later date, the price falls. holders of PAC CMO trances have higher prepayment risk Losses are first absorbed by the most junior (lower) classes. Thus, interest payments are made monthly. All of the following trade "and interest" EXCEPT: Which of the following are TRUE statements regarding treasury bills? They do have purchasing power risk (the risk of inflation eroding real returns), but this is only an issue for long-term maturities. The minimum denomination on a Treasury Bill is $100 maturity amount. D. no prepayment risk. Which statements are TRUE regarding treasury STRIPS? Also note that even though Standard and Poors downgraded Treasury Debt to an AA+ rating in the summer of 2011, Moodys and Fitchs retained their AAA ratings. Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like "wild cards" - whatever is left over is what you get! The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. B. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. A. average life of the tranche c. PAC tranche Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. The CMO is backed by mortgage backed securities created by a bank-issuer market value Yield quotes on CMOs are based on the expected life of the tranche that is quoted. treasury notes ** New York Times v. United States, $1974$ Each CMO tranche has an expected maturity, but the actual repayments are based on the rate of principal repayments that come in from the underlying mortgages - and this rate can vary. II. If interest rates start dropping, homeowners refinance and prepay their mortgages, and these prepayments are passed-through to pay off the tranches. III. I. Fannie Maes. What is the current yield, disregarding commissions? \begin{array}{c} II. the market is regulated by the SEC, the trading market is very active, with narrow spreads, Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? D. $325.00. Thus, there is no reinvestment risk, since semi-annual interest payments are not received. I. Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government C. the trade will settle in Fed Funds American depositary receiptC. $$, Which of the following court decisions restricted the ability of public officials to sue the press for libel? Thus, the certificate was priced as a 12 year maturity. Foreign broker-dealers III. b. Sallie Mae III. D. Companion tranche. The longer the maturity, the greater the price volatility of a negotiable debt instrument. \end{array} c. CMOs are subject to a higher level of prepayment risk than a pass through certificate Do not confuse this with the average life of the mortgages in the pool that backs the CMO. I When interest rates rise, the price of the tranche falls II When interest rates rise, the price of the tranche rises III When interest rates fall, the price of the tranche falls IV When interest rates fall, the price of the tranche rises" Question: Q5. B. IV. Treasury bill prices are rising, interest rates are falling A. Treasury NotesC. a. T-bills are traded at a discount from par Government National Mortgage Association Pass Through Certificates. In periods of deflation, the principal amount received at maturity is unchanged at par, In periods of deflation, the amount of each interest payment will decline Market interest rate movements have no effect on the stated interest rate paid by the security; and would not affect the credit rating of the issue. PAC tranche holders have lower prepayment risk than companion tranche holdersD. A customer who wishes to buy 1 Treasury Bill will pay: IV. There is little reinvestment risk with U.S. Government bonds because they are only callable in the last 5 years of their life. Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds II. Companion Older CMOs are known as plain vanilla CMOs, because the repayment scheme is relatively simple - as payments are received from the underlying mortgages, interest is paid pro-rata to all tranches; but principal repayments are paid sequentially to the first, then second, then third tranche, etc. Treasury Bonds are issued in either bearer or registered form When all of the interest is paid, the "notional principal" has been brought to par and the security is now paid off. Treasury STRIPD. I. PAC tranches reduce prepayment risk to holders of that tranche Which statements are TRUE when comparing Companion CMO tranches to plain vanilla CMO tranches? money market funds A. $25 per $1,000. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. For example, 30 year mortgages are now typically paid off in 10 years - because people move. PACs are similar to TACs in that both provide call protection against increasing prepayment speedsD. Thus, when interest rates rise, prepayment risk is decreased. B. I and IV . If interest rates drop, the market value of the CMO tranches will increase When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A. I when interest rates fallII when interest rates riseIII so they can refinance at lower ratesIV so they can refinance at higher rates. Which of the following securities has the lowest level of credit risk? A. III. Charity Navigator (https://www.charitynavigator.org) is a website dedicated to providing information regarding not-for-profit charitable organizations. When interest rates rise, the interest rate on the tranche rises. which statements are true about po tranches. The annual accretion amount is taxable, since the underlying securities are U.S. When all of the interest is paid, the notional principal has been brought to par and the security is now paid off. A. PAC tranche b. companion tranche All of the tranches are issued on the same date; but the maturities extend over a sequence of years. loan to value ratio. The Companion class has a lower level of prepayment risk than the PAC class, The PAC class is given a more certain maturity date than the Companion class
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