All of the statements are true about CMOs. Which statement is TRUE about PO tranches? 8/32nds = 1/4th = .25% of $1,000 par = $2.50. II. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. . b. planned securitization alogorithm IV. A. monthly D. have the same prepayment risk as companion classes. A customer buys 1 note at the ask price. The interest on these securities is subject to both Federal and State and Local income tax; hence CMOs are taxed in the same manner. II. Since ETCs are secured by rolling stock, they are safer than Industrial revenue bonds, which are backed by lease payments made by a corporate lessee and the guarantee of that lessee. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. III. B. c. the interest coupons are sold off separately from the principal portion of the obligation a. T-bills are traded at a discount from par Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. PAC tranche holders have higher extension risk than companion tranche holders. Interest is paid after all other tranches B. purchasing power risk A. Thereby when interest rates increase, prices increase, and vice versa. Which statements are TRUE regarding treasury STRIPS? The dollar price of a $1,000 par bond is: A $950.24 B $952.40 C $957.50 D $1,000.00. Brainscape helps you realize your greatest personal and professional ambitions through strong habits and hyper-efficient studying. Which of the following statements are true? Newer CMOs divide the tranches into PAC tranches and Companion tranches. mortgage backed securities created by a bank-issuerC. Companion tranches are the "shock absorber" tranches, that absorb prepayment risk out of a TAC (Targeted Amortization Class) tranche; or both prepayment risk and extension risk out of a PAC (Planned Amortization Class) tranche. Treasury Receipts, Treasury Bills A. Agency CMOs are backed by underlying mortgage backed pass-through certificates issued by that agency, while Private Label CMOs are backed only by mortgage backed securities issued by private lenders CMBs are Cash Management Bills. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. C. certificates are issued in minimum units of $25,000 A. I. all rated AAA Although controversial and the subject of recent lawsuits (e.g., Satchell et al. Freddie Mac pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates). An annual upward adjustment due to inflation is not taxable in that year; an annual downward adjustment due to deflation is not tax deductible in that year.D. I have underlying mortgage collateral that is backed by Fannie Mae, Freddie Mac or Ginne MaeII have underlying mortgage collateral that is backed only by the credit quality of those mortgagesIII are all rated AAAIV are rated based on the credit quality of the underlying mortgages. Which statements are TRUE regarding the effect of changing interest rates on the expected maturity of a CMO tranche? When comparing the effect of changing interest rates on prices of a CMO issues versus the prices of regular bond issues, which of the following statements are TRUE? If interest rates rise, then the expected maturity will lengthen II and IIID. The CMO is rated AAA A. U.S. Government Bonds Which of the following statements regarding the settlement of forward contracts is correct? The collateral backing private CMOs consists of: lower extension riskC. abbreviation for Collateralized Debt Obligation, this is a structured product that invests in CMO tranches and was used to create tranches based on underlying sub-prime mortgages. II. c. predicted standardization amortization I. 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 TAC is a variant of a PAC that has a higher degree of extension risk when interest rates fall, prepayment rates fall, when interest rates rise, prepayment rates fall b. increase prepayment risk to holders of that tranche Its price moves just like a conventional long term deep discount bond. Besides, these portions of bonds or mortgages have varying amounts of risk and maturity. $.025 per $1,000B. Governments. The key word is riskless. Treasury bills mature in 52 weeks or less and are issued by the U.S. Government, the safest issuer available. 0. which statements are true about po tranches All of the tranches are issued on the same date; but the maturities extend over a sequence of years. Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date? Treasury Bonds have minimum maturity of more than 10 years, Which investment does NOT have purchasing power risk? 90 Ginnie Mae stock is traded on the New York Stock Exchange 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 All of the following are true statements regarding revenue bonds EXCEPT: A) issuance of the bonds is dependent on earnings requirements. TACs do not offer the same degree of protection against "extension risk" as do PACs during periods of rising interest rates - hence their prices will be more volatile during such periods. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. IV. \hline \textbf{For the Year Ended December 31, 2013, 2014 and 2015}\\ III. B. The interest earned from which of the following is exempt from state and local tax? Both PACs and TACs offer the same degree of protection against extension riskB. are made monthly B. mortgage backed securities created by a bank-issuer The last 3 statements are true. d. taxable at maturity, taxable in that year as interest income received, Which CMO tranche is least susceptible to interest rate risk? $10,000D. Fannie Mae debt securities are negotiable, When comparing the debt issues of Ginnie Mae to Fannie Mae, which statements are TRUE? Extended maturity risk Compute the derivative of the given function and find the slope of the line that is tangent to its graph for the specified value of the independent variable. B. C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class IV. Each tranche has a different level of market risk The spread is: A. Reinvestment risk is greater for Ginnie Maes than for U.S. All of them which statements are true about po tranches. GNMA pass through certificates are guaranteed by the U.S. Government, All of the following statements are true about the Government National Mortgage Association Pass-Through Certificates EXCEPT: B. the certificates are available in $1,000 minimum denominations IV. T-Bills are the most actively traded money market instrument, T-Bills can be purchased directly at weekly auction Therefore, both PACs and TACs provide "call protection" against prepayments during period of falling interest rates. Which of the following statements are TRUE regarding CMOs? $25 per $1,000. 24/32nds = .75, so the bond is quoted at 95.75% of $1,000 par value = $957.50. The PAC class has a lower level of prepayment risk than the Companion class The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pools: A. standard deviation of returnsB. All of the following trade "and interest" EXCEPT: Which of the following are TRUE statements regarding treasury bills? This is true because when the certificate was purchased, assume that the average life of the underlying 15 year pool (for example) was 12 years. I. T-Bills can be purchased directly at weekly auction Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates. 95 Which of the following statements are TRUE about computerized trading of securities on exchanges? A TAC bond is designed to pay a target amount of principal each month. \hline \text { Operating income } & \text { } & \text { } \\ D. When interest rates rise, the interest rate on the tranche rises. This is a tranche that only receives the interest payments from an underlying mortgage, and it is created with a corresponding PO (Principal Only) tranche that only receives the principal payments from that mortgage. This prepayment speed assumption is used to guesstimate the expected life of a mortgage backed pass-through certificate. The minimum denomination on Treasury Notes and Bonds is also $100 maturity amount. Which is the most important risk to discuss with this client? I The interest income on the Receipts is subject to Federal income tax each yearII The interest income on the Receipts is exempt from Federal income taxIII An investment in Treasury Receipts is free from reinvestment riskIVAn investment in Treasury Receipts is subject to reinvestment risk. A. Short-term Treasury Bills have almost no purchasing power risk as well, so they are considered to be a risk-free security. Note, however, that the PSA can change over time. I, II, IVD. Fannie Mae debt securities are negotiable Which of the following statements are TRUE regarding Treasury Stock? This makes CMOs more accessible to small investors. A TAC is a variant of a PAC that has a higher degree of prepayment risk receives payments on a pro-rata basis with other tranchesD. 4 weeks Treasury Bills are quoted on a yield to maturity basis A. \text{Unrealized gain (loss) on available-for-sale investments}&&&(16,400)\\ The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. c. PAC tranche I. FNMA They are the shortest-term U.S. government security, often with maturities as short as 5 days. IV. D. Collateral trust certificate, Treasury bond money market funds IV. However, if prepayment rates slow, the TAC absorbs the available cash flow, and goes in arrears for the balance. 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. An IO is an Interest Only tranche. The remaining statements are all true - CMOs have a serial structure since they are divided into 15 - 30 maturities known as tranches; CMOs are rated AAA; and CMOs are more accessible to individual investors since they have $1,000 minimum denominations as compared to $25,000 for pass-through certificates. A customer buys 5M of the notes. They are auctioned off weekly by the Federal Reserve acting as agent for the U.S. Treasury. B. higher prepayment risk, but the same extension risk as a Planned Amortization Class Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. Again, these are derived via a formula. III. Which CMO tranche will be offered at the lowest yield? CMOs divide the cash flows into tranches of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. In periods of deflation, the amount of each interest payment will decline Which statements are TRUE regarding Z-tranches? a. treasury bills 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. T-bills are issued at a discount, T-bills are registered in the owner's name in book entry form Plain vanillaB. c. semi-annually Interest rate risk, Extended maturity risk I. T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve Thus, average life of the TAC is extended until the arrears is paid. From the basis quote, the dollar price is computed. These credit ratings agencies really did not understand the complex structure of CDOs and how risky their collateral was (sub-prime mortgage loans that were often no documentation liar loans). On the other hand, extension risk is increased. When interest rates rise, the interest rate on the tranche fallsD. A. GNMA securities are guaranteed by the U.S. Government Treasury bill prices are rising, interest rates are falling a. Ginnie Mae obligations trade at higher yields than Fannie Mae obligations IV. part of budgeting? If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs \textbf{Selected Balance Sheet Items}\\ II. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. Interest received by the holder of a mortgage backed pass through security is fully taxable by both federal, state, and local government. d. risk of loss of principal if interest rates rise, risks of default if homeowners do not make their mortgage payments, All of the following statements are true about the government national mortgage association pass-through certificates EXCEPT: He wants to receive payments over a minimum 10-year investment time horizon. Treasury Bills \text { Gain (loss) from sale of investments } & \$ 7,500 & \$(12,000) \\ B. D. the same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class, the same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class, Which statements are TRUE regarding Z-tranches? 2/32nds = .0625% of $1,000 par = $.625. **b. A. GNMA is empowered to borrow from the Treasury to pay interest and principal if necessary IV. Corporate and municipal bond trades settle in clearing house funds. represent a payment of both interest and principal I. coupon rate remains at 4% An official statement issued by the finance ministry said the estimated shortfall of 1.1 trillion, assuming all states opt for borrowing, will be borrowed by central government in tranches and passed on to states "as a back-to-back loan in lieu of GST Compensation cess releases." If interest rates drop, the market value of the CMO tranches will increase If the maturity shortens, then for a given fall in interest rates, the price will rise slower. storm in the night central message Facebook-f object to class cast java Instagram. The annual accretion amount is subject to Federal income tax each year, as the underlying securities are U.S. There is no such thing as an AAA+ rating; AAA is the highest rating available. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded The interest portion of a fixed rate mortgage makes larger payments in the early years, and smaller payments in the later years. Users should NOT be allowed to delete review records after job application records have been approved. When interest rates rise, the price of the tranche fallsB. The service limit is set by administrators to allow users to use the required resources. D. the credit rating is considered the highest of any agency security. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. The CMO is backed by mortgage backed securities created by a bank-issuer Agency CMOs carry the direct or implied guarantee of the U.S. Government while Private Label CMOs do not have such a guarantee Government agency securities have an indirect backing (or implicit) by the U.S. Government. Which statement is FALSE when comparing Agency CMOs to Private Label CMOs? A. CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations When interest rates rise, the price of the tranche risesC. FNMA pass through certificates are guaranteed by the U.S. Government A Z-tranch is a Zero tranche. Notice that the fact that the bond is trading at a discount is irrelevant - the interest payment is based on the stated interest rate times par value. CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. U.S. Government Agency bonds C. guarantee of the financial institution from which the mortgages were purchased D. In periods of inflation, the principal amount received at maturity is more than par. Macaulay durationD. fallC. C. Series EE Bonds A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. IV. A. a dollar price quoted to a 4.90 basis Which statements are TRUE regarding collateralized mortgage obligations? GNMA pass through certificates are not guaranteed by the U.S. Government, GNMA is owned by the U.S. Government b. T-bills are the most actively traded money market instrument Which statement is TRUE regarding the tax treatment of the annual adjustment to the principal amount of a Treasury Inflation Protection Security? Thus, there is no reinvestment risk, since semi-annual interest payments are not received. d. payment of interest and principal on the underlying security is guaranteed by the US government, Which of the following statements are true regarding the trading of government and agency bonds? Treasury STRIP. Charity Navigator (https://www.charitynavigator.org) is a website dedicated to providing information regarding not-for-profit charitable organizations. A. A. d. TAC tranche, Which statement is FALSE about CMBs?
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