This interest income is subject to both federal income tax and state and local tax. Arrange the following CMO tranches from lowest to highest yield: II rated based on the credit quality of the underlying mortgages. Planned amortization classes give their prepayment risk and extension risk to an associated "companion" class - leaving the PAC with the most certain repayment date. D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. 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. In periods of deflation, the amount of each interest payment will decline I. Ginnie Mae is a publicly traded company 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. CMO "Planned Amortization Classes" (PAC tranches): There is usually a cap on how high the rate can go and a floor on how low the rate can drop. An annual upward adjustment due to inflation is taxable in that year; an annual downward adjustment due to deflation is tax deductible in that year.C. Treasury STRIP. A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. Private CMOs (Collateralized Mortgage Obligations) are also called private label CMOs. T-Bills trade at a discount from par This is a tranche that only receives the principal payments from an underlying mortgage, and it is created with a corresponding IO (Interest Only) tranche that only receives the interest payments from that mortgage. Interest payments are still made pro-rata to all tranches (like plain vanilla CMOs), 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. A derivative product is one whose value is derived via a formula from an underlying investment. 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. I. Prepayment Rate which statements are true about po tranchesmichelle woods role on burn notice. B. D. unrelated to the rate on an equivalent maturity Treasury Bond, less than the rate on an equivalent maturity Treasury Bond, Which statements are TRUE regarding Treasury Inflation Protection securities? Thus, the average life of pass-through certificates that represent ownership of that mortgage pool will lengthen; as will the average life of CMO tranches which are derived from those certificates (though not to the same extent). Prepayment risk A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. A. Which of the following securities has the lowest level of credit risk? Annual interest on the bonds is 3.25% of $5,000 face amount equals $162.50. are made monthly coupon rate remains at 4% a. prepayment speed assumption d. have the same prepayment risk as companion classes, reduce prepayment risk to holders of that tranche, Which statements are TRUE when comparing PAC CMO tranches to "plain vanilla" CMO tranches? b. treasury notes on the business day after trade date, A customer buys 5M of 3 1/4% Treasury Bonds at 98-8. Planned Amortization Class The interest earned from which of the following is exempt from state and local tax? Sallie Mae is wholly owned by the U.S. Government They are the shortest-term U.S. government security, often with maturities as short as 5 days. Fannie Mae issues are not directly backed by the full faith and credit of the U.S. Government, Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government IV. All of the statements are true about CMOs. These are issued at a deep discount to face. III. The pure interest rate is one that is free of any investment risks - it is the pure cost of borrowing without any risk premium added to the interest rate. Which statement is TRUE about floating rate tranches? C. $162.50 When interest rates rise, the price of the tranche rises II. a. T-bills are traded at a discount from par I. All of the following statements are true about the Federal National Mortgage Association Pass-Through Certificates EXCEPT: D. 50 mortgage backed pass through certificates at par. They are the shortest-term U.S. government security, often with maturities as short as 5 days. \hline \textbf{For the Year Ended December 31, 2013, 2014 and 2015}\\ c. eliminate prepayment risk to holders of that tranche A. IV. B. TAC tranche T-bills are issued at a discount, T-bills are registered in the owner's name in book entry form III. CMOs divide the cash flows into tranches of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates. Which of the following statements are TRUE about computerized trading of securities on exchanges? 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. 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. 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 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. If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. II. A. CMBs are used to smooth out cash flow when interest rates rise, prepayment rates fall These represent a payment of both interest and principal on the underlying mortgages. When the bond matures, the holder receives the higher principal amount. The interest portion of a fixed rate mortgage makes larger payments in the early years, and smaller payments in the later years. Collateralized mortgage obligation values are derived from the underlying mortgage backed pass-through certificates held in trust by recutting the cash flows and applying them to the CMO tranches. c. Ginnie Mae He wants to receive payments over a minimum 10-year investment time horizon. II. B. B. B. These are funds payable at a registered clearing house, which are usually not good funds for three business days. Thus, the interest rate on a short-term T-Bill is the pure interest rate - the same thing as the risk-free rate of return. A. PAC tranche IV. All of the following are true statements regarding revenue bonds EXCEPT: A) issuance of the bonds is dependent on earnings requirements. Governments. I. Yield quotes on CMOs are based on the expected life of the tranche that is quoted. II. Both securities pay interest at maturity III. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. IV. 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. c. semi-annually IV. c. T-bills have a maximum maturity of 9 months III. Which statement is TRUE? The implicit rate of return is locked-in when the security is purchased, and the customer will earn that rate of return if the security is held to maturity. II. when interest rates fall, prepayment rates fall, when interest rates rise, prepayment rates fall T-Notes are issued in bearer form. $81.25 D. FNMA bond. mortgages on privately owned homes and apartments. The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pools: A. standard deviation of returnsB. I When interest rates rise, the price of the tranche fallsII When interest rates rise, the price of the tranche risesIII When interest rates fall, the price of the tranche fallsIV When interest rates fall, the price of the tranche rises. Since 1 Basis Point = .01% = $.10, 140 Basis Points = 1.40% = $14.00. C. guarantee of the financial institution from which the mortgages were purchased The market has never recovered. The service limit is defined using policy statements in the tenancy. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). III. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). II. No certificates are issued for book entry securities; the only ownership record is the "book" of owners kept by the transfer agent. A. 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 The note pays interest on Jan 1 and Jul 1. The loan to value ratio is a mortgage risk measure. 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. III. on the same day as trade date Certain CMO tranches may represent a right to receive interest only ("IOs"), principal only ("POs") or an amount that remains after floating-rate tranches are paid (an "inverse floater"). I. 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). $$ Treasury Bonds are quoted at a discount to par value **d.** Nebraska Press Association v. Stuart, $1976$ B. III. Which of the following trade "flat" ? Companion. IV. ), Fannie Mae (Federal National Mortgage Assn. Treasury Bills d. Freddie Mae, Which of the following would NOT purchase STRIPS? D. call risk. Both securities are sold at a discount From the basis quote, the dollar price is computed. 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 I Treasury Stock receives dividends II Treasury Stock votes III Treasury Stock reduces the number of shares outstanding IV Treasury Stock purchases are used to increase reported Earnings Per Share A. I and II B. III and IV C. II, III, IV D. I, II, III, IV B. III and IV \quad\quad\quad\textbf{Assets}\\ Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government Collateralized mortgage obligations are backed by mortgage pass-through certificates that are held in trust. III. CMOs have investment grade credit ratings I Each tranche has a different level of market riskII Each tranche has the same level of market riskIII Each tranche has a different yieldIV Each tranche has the same yield. They tend not to prepay mortgages when interest rates rise, since there is no benefit to a refinancing. D. $6.25 per $1,000. A. each tranche has a different maturity \textbf{For the Year Ended December 31, 2014 and 2015}\\ The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. IV. The spread is: They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. A III. Federal Home Loan Bank Bonds. 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. all rated AAA Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. Treasury Bills D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis. loan to value ratio. 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.
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