which statements are true about po tranches

Which of the following trade "flat" ? The interest income from direct issues of the U.S. Government and most agency obligations is subject to federal income tax but is exempt from state and local tax. T-Notes are issued in bearer form. C. Treasury STRIP Because they trade, the liquidity risk aspect of structured products is eliminated. C. Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds B. It acts like a long-term zero coupon bond. When interest rates rise, the price of the tranche rises What is NOT a risk of investing in a GNMA? C. each tranche has a different credit rating This is true because prepayments on pass-through certificates are allocated pro-rata. I CMO issues have a serial structureII CMO issues are rated AAAIII CMO issues are more accessible to individual investors than regular pass-through certificatesIV CMO issues have a lower level of market risk than regular pass-through certificates, A. I and II onlyB. What is the current yield, disregarding commissions? They are the shortest-term U.S. government security, often with maturities as short as 5 days. I. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. II. B. 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). \text{Available-for-sale investments, at fair value}&&&\\ III. CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. B. U.S. Government Agency Securities have an implicit backing by the U.S. Government 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. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? IV. a. CMOs are available in $1,000 denominations &\textbf{Dec.31, 2013}&\textbf{Dec.31, 2014}&\textbf{Dec.31, 2015}\\\hline A newer version of a CMO has a more sophisticated scheme for allocating cash flows. The best answer is C. CMBs are Cash Management Bills. Thus, the certificate was priced as a 12 year maturity. A. 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. 78 weeks, $100 is the minimum denomination for all of the following EXCEPT: III. ", An investor in 30 year Treasury Bonds would be most concerned with: Which of the following statements are TRUE about CMOs in a period of rising interest rates? can be backed by sub-prime mortgages The spread is: I. pension funds D. $4,945.00. Targeted Amortization Class After reviewing the website, explain how not-for-profit organizations are rated. 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. 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. A. credit risk A. Which statement is FALSE when comparing Agency CMOs to Private Label CMOs? 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? 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 VanillaC. prepayment speed assumptionC. a. prepayment speed assumption A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. Interest earned is subject to reinvestment risk, The bonds are issued at a discount The holder of a specific tranche of a CMO will only receive prepayments after all earlier tranche holders are repaid. ), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. III. Treasury STRIP. C. Treasury Bonds I. CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations If the maturity shortens, then for a given fall in interest rates, the price will rise slower. Which statements are TRUE about IO tranches? I When interest rates rise, mortgage backed pass through certificates fall in price faster than regular bonds of the same maturityII When interest rates rise, mortgage backed pass through certificates fall in price slower than regular bonds of the same maturityIII When interest rates fall, mortgage backed pass through certificates rise in price faster than regular bonds of the same maturityIV When interest rates fall, mortgage backed pass through certificates rise in price slower than regular bonds of the same maturity, A. I and IIIB. $35.00 Price volatility of a CMO issue would most closely parallel that of an equivalent maturity: A. D. Guaranteed by the U.S. Government, Which of the following statements are TRUE about the Government National Mortgage Association (GNMA)? C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class Quoted as a percent of par in 32nds Which statements are TRUE about IO tranches?Which statements are TRUE about IO tranches? Interest earned is subject to reinvestment risk The bonds are issued at a discount Interest income is accreted and taxed annually IV. IV. There are no new T-Receipt issues coming to market. All of the following statements are true regarding money market funds EXCEPT: A. typical maturities of securities held in the portfolio are 30 days or less B. fund dividends are not taxable if reinvested in additional shares money market funds are typically sold without a sales charge money market funds impose management fees. A. lower prepayment risk, but the same extension risk as a Planned Amortization Class III. II. CDO tranches are: Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. D. accrued interest on the certificates is computed on a 30 day month/360 day year basis, the certificates are available in $1,000 minimum denominations, Which of the following trades settle in "clearing house" funds? 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: $10,000D. C. $162.50 a. weekly Securities and Exchange Commission Because the principal is being paid back at an earlier date, the price rises. Mortgage backed pass-through certificate D. Treasury Receipts. Prepayment risk 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. The principal portion of a fixed rate mortgage makes smaller payments in the early years, and larger payments in the later years. A floating rate CMO tranche is MOST similar to a: The best answer is B. When interest rates rise, the interest rate on the tranche fallsD. 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. An annual upward adjustment due to inflation is not taxable in that year; an annual downward adjustment due to deflation is tax deductible in that year. 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). Companion ClassD. A. reduce prepayment risk to holders of that tranche A. The PAC class has a lower level of prepayment risk than the Companion class Treasury NotesC. The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. D. $325.00. b. treasury notes A PO is a Principal Only tranche. b. treasury bills III. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. The holder is not subject to reinvestment risk, Which of the following statements are TRUE about Treasury Receipts? Sallie Mae stock does not trade, Sallie Mae is a privatized agency III. Treasury STRIPD. The service limit is set by administrators to allow users to use the required resources. Federal Farm Credit Funding Corporation Note. Accrued interest on the certificates is computed on an actual day month / actual day year basis Regular way trades of U.S. Government bonds settle: Freddie MacsC. II. Newer CMOs divide the tranches into PAC tranches and Companion tranches. 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). A. The Federal Reserve would permit which of the following to be "primary" U.S. Government securities dealers? When this interest is received by the certificate holder, both the federal and state government want to recapture this interest income and tax it. In periods of deflation, the amount of each interest payment will decline 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. Both securities are sold at a discount Ginnie Mae is backed by the guarantee of the U.S. Government, making it the highest credit rated agency security. Treasury STRIPS are not a derivative, because the value of the coupons "stripped" from the Treasury bonds is a direct correlation to the interest payments received from the underlying U.S. Government securities. FHLMC IV. c. STRIPS III. 26 weeks III. Interest rate risk, 140 Basis points equal: I Payments are larger in the early yearsII Payments are smaller in the early yearsIII Payments are larger in the later yearsIV Payments are smaller in the later years. The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pool's: If interest rates rise, then the expected maturity will lengthen A. Collateral trust certificates are directly issued by corporations - these are not derivative investments. The service limit is a quota set on a resource. 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. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. Which of the following is an original issue discount obligation? IV. The CMO is rated AAA $81.25 Minimum $100 denominations D. loan to value ratio. marketability risk 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). Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. which statements are true about po tranches. Yield quotes for collateralized mortgage obligations are based upon: 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. These are also not a derivative product. Both securities pay interest at maturity, The physical securities which are the underlying collateral for Treasury Receipts are: Credit Rating. Extended maturity risk Thus, PACs have lower extension risk than plain vanilla CMO tranches. The loan to value ratio is a mortgage risk measure. T-Bills are issued at a discount from par. \text { Gain (loss) from sale of investments } & \$ 7,500 & \$(12,000) \\

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