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Interest payments are still made pro-rata to all tranches, but principal repayments made earlier than that required to retire the PAC at its maturity are applied to the Companion class; while principal repayments made later than expected are applied to the PAC maturity before payments are made to the Companion class. Thus, there is no reinvestment risk, since semi-annual interest payments are not received. b. interest payments are exempt from state and local taxes The best answer is C. CMBs are Cash Management Bills. CMO investors are subject to which of the following risks? Principal only strips are. If prepayments increase, they are made to the Companion class first. Which statements are TRUE regarding CMOs? If the principal amount of a Treasury Inflation Protection Security is adjusted upwards due to inflation, the adjustment amount is taxable in that year as ordinary interest income. So if you're in a war, and the war is "Invasion of the Body Snatchers" where you don't know who is compromised (and was why that movie was made), then people die in a war. II. CDO tranches are: I. CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations. Planned amortization classD. They are the shortest-term U.S. government security, often with maturities as short as 5 days. default risk, A 5 year, 3 1/4% treasury note is quoted at 101-4 - 101-8. Treasury Bill A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. Agency CMOs are created by Ginnie Mae, Fannie Mae, or Freddie Mac, using their own mortgage backed securities (MBSs) as the underlying collateral. Thus, the average life of pass-through certificates that represent ownership of that mortgage pool will shorten; as will the average life of CMO tranches which are derived from those certificates (though not to the same extent). Ch.2 - *Quiz 2. GNMA Pass-Through Certificates. I and IVC. IV. Securities and Exchange Commission T-Notes are issued in book entry form with no physical certificates issued B. federal funds rate Which two statements are true about service limits and usage? I. PAC tranches reduce prepayment risk to holders of that tranche A TAC bond is designed to pay a target amount of principal each month. The best answer is C. When interest rates rise, the price of the tranche fallsC. Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. b. T-bills are the most actively traded money market instrument A TAC is a variant of a PAC that has a higher degree of prepayment risk In periods of deflation, the interest rate is unchanged 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. If interest rates rise, then the expected maturity of a CMO tranche will lengthen, due to a lower prepayment rate than expected. The certificates are quoted on a yield basis Question 6 You bought a CMO tranche that does not receive any cash flows until all other tranches have been repaid and whose principal grows at a predetermined rate each period. III. IV. If interest rates drop, the market value of the CMO tranches will increase II. I The investor locks in a rate of return that is free from reinvestment risk if the Receipt is held to maturityII The underlying bonds are held by a trustee for the beneficial ownersIII The interest income on the Receipts is subject to Federal income tax annuallyIV The Receipts are issued by broker-dealers, who maintain a secondary market in these securities, A. III and IV onlyB. A "derivative" product is one whose value is "derived" via a "formula" from an underlying investment. Which of the following statements are TRUE about Treasury Receipts? Homeowners will prepay mortgages when interest rates fall, so they can refinance at more attractive lower current rates. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. Treasury Bonds have minimum maturity of more than 10 years, Treasury Bonds are traded in 32nds If interest rates are rising rapidly, which U.S. Government debt prices would be MOST volatile? There is usually a cap on how high the rate can go and a floor on how low the rate can drop. Federal Home Loan Bank Bonds. III. II. A. B. Freddie Mac Pass Through Certificates are stableD. c. T-bills have a maximum maturity of 9 months The note pays interest on Jan 1st and Jul 1st. Fannie Mae debt securities are negotiable Which of the following is an example of a derivative product? Both securities pay interest at maturity 0. which statements are true about po tranches I. Sallie Mae is a privatized agency \text{Available-for-sale investments, at fair value}&&&\\ If a customer buys 5 T-notes on Friday, April 4th in a regular way trade, how many days of accrued interest are owed to he seller? A. The CMO is backed by mortgage backed securities created by a bank-issuer IV. individuals seeking current income Only mortgage backed pass-through certificates are used as the backing for CMOs - and Ginnie Mae (Government National Mortgage Assn. 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). B. March 2, 2023 at 12:39 pm #130296. 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. Science, 28.10.2019 21:29, nicole8678. IV. A. average life of the tranche 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 A newer version of a CMO has a more sophisticated scheme for allocating cash flows. I. FNMA II. GNMA pass through certificates are not guaranteed by the U.S. Government, GNMA is owned by the U.S. Government All of the following would be considered examples of derivative products EXCEPT: D. combined serial and series structures. Planned Amortization Class Do not confuse this with the average life of the mortgages in the pool that backs the CMO. A customer buys 5M of the notes. no extension risk. 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. ** New York Times v. United States, $1974$ holders of "plain vanilla" CMO tranches have higher prepayment risk, holders of PAC CMO tranches have lower prepayment risk The bonds with the highest credit risk are Industrial revenue bonds and Equipment trust certificates. the same level of extension riskD. IV. An exception is the interest income received from mortgage backed pass through certificates (issued by GNMA, FNMA, FHLMC). Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. I CMOs make payments to holders monthlyII CMOs receive the same credit rating as the underlying pass-through securities held in trustIII CMOs are subject to a lower level of prepayment risk than the underlying pass-through certificatesIV CMOs are available in $1,000 denominations, A. II, III, IVB. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). The market has never recovered. FHLMC All of the following are true statements regarding revenue bonds EXCEPT: A) issuance of the bonds is dependent on earnings requirements. Regarding the Student Loan Marketing Association (Sallie Mae) which of the following statements are TRUE? The service limit is a quota set on a resource. I, II, III, IV. B. increase prepayment risk to holders of that tranche C. semi-annually Interest payments are still made pro-rata to all tranches, but principal repayments made earlier than that required to retire the PAC at its maturity are applied to the Companion class; while principal repayments made later than expected are applied to the PAC maturity before payments are made to the Companion class. This avoids having to pay tax each year on the upwards principal adjustment.). Which of the following statements regarding the settlement of forward contracts is correct? $.25 per $1,000C. $81.25 D. Any of the above. Today 07:16 Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date? A. C. Treasury Bonds c. treasury bonds A Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government b. C. certificates trade "and interest" T-Notes are issued in bearer form. 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. Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. These trades are settled through NSCC - the National Securities Clearing Corporation. Home . In periods of deflation, the principal amount received at maturity will decline below par represent a payment of only interest. The bonds are issued at a discount III. III. The formula for current yield is: Annual Income = Current YieldMarket Price. Which statements are TRUE when comparing Companion CMO tranches to plain vanilla CMO tranches? Which statement is TRUE about PO tranches? The PAC, which is relieved of these risks, is given the most certain repayment date. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. Which CMO tranche will be offered at the lowest yield? These are funds payable at a registered clearing house, which are usually not good funds for three business days. In periods of inflation, the principal amount received at maturity will be par What is the effect of the transaction on cash flows if (a)$15,000 cash is received for the equipment, (b) no cash is received for the equipment? D. Zero Tranche. If prepayments increase, they are made to the Companion class first. Freddie Mac pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates). The service limit is set by administrators to allow users to use the required resources. B. interest payments are exempt from state and local tax During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. Foreign broker-dealers a. the full faith and credit of the US governments backs the securities underlying the issue D. expected interest rate, The nominal interest rate on a TIPS is: Charity Navigator (https://www.charitynavigator.org) is a website dedicated to providing information regarding not-for-profit charitable organizations. Sallie MaesB. which statements are true about po tranchesmichelle woods role on burn notice. If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. Treasury STRIPD. Regulations: Securities Exchange Act of 1934, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Daniel F Viele, David H Marshall, Wayne W McManus, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman. Newer CMOs divide the tranches into PAC tranches and Companion tranches. A customer buys 5M of the notes. CMO "Planned Amortization Classes" (PAC tranches): Which statements are TRUE about PO tranches? How many inches long is a 6236 \frac{2}{3}632-yard roll of aluminium foil? But we've saved 90% of the people and identified most of the alien overlords and their centers. CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. mortgages on privately owned homes and apartments. D. Targeted Amortization Class, Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. B. Non- deliverable forwards and contracts for differences have distinct settlement procedures. All of the following trade "and interest" EXCEPT: Of the choices offered, which security is least subject to purchasing power risk? I, II, IIIC. U.S. Government debt is sold via competitive bidding at a weekly auction conducted by the Federal Reserve. There are no new T-Receipt issues coming to market. D. Treasury Stock, Which of the following are TRUE statements about Treasury Bills? Thus, payments are received monthly. \textbf{For the Year Ended December 31, 2013, 2014 and 2015}\\ II and IV. $10,000D. 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? The holder is subject to reinvestment risk II. C. When interest rates rise, the interest rate on the tranche falls reduce prepayment risk to holders of that tranche Interest is paid after all other tranches B. d. taxable at maturity, taxable in that year as interest income received, Which CMO tranche is least susceptible to interest rate risk? The principal portion of a fixed rate mortgage makes smaller payments in the early years, and larger payments in the later years. This pool, with say an average life of 12 years, is "chopped-up" into many different tranches, each with a given "expected life." The bonds are issued at a discount I. all rated AAA B. CMBs are sold at a discount to par A newer version of a CMO has a more sophisticated scheme for allocating cash flows. D. $6.25 per $1,000. III. C. Pay interest at maturity When interest rates rise, the price of the tranche risesC.

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