If the corporate lessee were to default; and then declare bankruptcy, the IRB holders would be left with worthless paper. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. It gets no payments until all prior tranches are retired. 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. If the maturity shortens, then for a given fall in interest rates, the price will rise slower. C. Treasury Bonds Interest is paid semi-annually An exception is the interest income received from mortgage backed pass through certificates (issued by GNMA, FNMA, FHLMC). \textbf{Highland Industries Inc.}\\ C. Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds II. $25 per $1,000. The Federal Reserve would permit which of the following to be "primary" U.S. Government securities dealers? Credit Rating. rated based on the credit quality of the underlying mortgages I, II, III, IV. 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. 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. When interest rates rise, the price of the tranche rises 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. These trades are settled through NSCC - the National Securities Clearing Corporation. C. semi-annually $.0625 per $1,000 $$ On the other hand, extension risk is decreased. Why? When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. 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 The securities underlying CMOs are GNMA or FNMA mortgage backed pass-through certificates. Thus, the prepayment rate for CMO holders will increase. The best answer is B. b. they are "packaged" by broker-dealers If it is an agency CMO created by Ginnie Mae, the securities have the direct backing of the U.S. Government; if the agency CMO is created by Fannie Mae or Freddie Mac, it has the implied backing of the U.S. Government. 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 A. 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. Holders of CMOs receive interest payments: Treasury STRIPS are not suitable investments for individuals seeking current income are stableD. A. lower prepayment risk, but the same extension risk as a Planned Amortization Class mortgages on privately owned homes and apartments. I, II, III, IV. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. Interest received from all of the following securities is exempt from state and local taxes EXCEPT: A government bond dealer is making good delivery to another government dealer. A. a dollar price quoted to a 4.90 basis Which statements are TRUE regarding CMOs? IV. II. Which statements are TRUE about IO tranches?Which statements are TRUE about IO tranches? PAC tranche holders have lower prepayment risk than companion tranche holdersD. This avoids having to pay tax each year on the upwards principal adjustment.). I. FNMA is a publicly traded corporation These trades are settled through GSCC - the Government Securities Clearing Corporation. CMOs receive the same credit rating as the underlying pass-through securities held in trust Sallie Mae issues debentures, and uses the funds to make a secondary market, buying student loans from originating lenders (Sallie Mae stands for Student Loan Marketing Association). when interest rates rise, prepayment rates fall d. TAC tranche, A structured product that invests in tranches of private label subprime mortgages is a: A. higher prepayment risk T-Bills are the most actively traded money market instrument, Which statements are always TRUE about Treasury Bonds? B. Interest income is accreted and taxed annually A. CMBs are used to smooth out cash flow A. C. Series EE Bonds Which statement is TRUE about floating rate tranches? $$ which statements are true about po tranches. Commercial banks 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. 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. 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. C. certificates are issued in minimum units of $25,000 B. d. Freddie Mae, Which of the following would NOT purchase STRIPS? Post author: Post published: June 23, 2022 Post category: assorted ornament by ashland assorted ornament by ashland c. the trade will settle in Fed Funds CMOs are not issued by government agencies; the agency issues the underlying pass-through certificates. The service limit is a quota set on a resource. T-bills are callable at any time The CMO is backed by mortgage backed securities created by a bank-issuer A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. The best answer is C. CMBs are Cash Management Bills. The first 3 statements are true. B. increase prepayment risk to holders of that tranche 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. Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. Users should NOT be allowed to delete review records after job application records have been approved. step up step down bond d. taxable at maturity, taxable in that year as interest income received, Which CMO tranche is least susceptible to interest rate risk? B. prepayment speed assumption I. treasury bills The smallest denomination available for Treasury Bills is: A. Therefore, an interest rates move up, the interest rate paid on the tranche steps up as well; and when interest rates drop, the interest rate paid on the tranche steps down down as well. Payment is to be made in: Which is considered to be a direct obligation of the US government? which statements are true about po tranches. Plain vanilla Collateral trust certificates are directly issued by corporations - these are not derivative investments. The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. The current yield does not factor in the loss of the premium over the life of the bond, whereas yield to maturity does. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. I, II, IVC. Thereby when interest rates increase, prices increase, and vice versa. c. CMOs are subject to a higher level of prepayment risk than a pass through certificate Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. Which statement is TRUE about IO tranches? \hline 29 terms. Governments. The Companion, which absorbs these risks first, has the least certain repayment date. I. I. FNMA which statements are true about po tranches. GNMA Pass-Through Certificates. C. more than the rate on an equivalent maturity Treasury Bond The CMO takes on the credit rating of the underlying collateral. C. each tranche has a different credit rating Sallie Mae stock is listed and trades I. the trading market is very active, with narrow spreads When the bond matures, the holder receives the higher principal amount. III. Sallie Mae stock is listed and trades, Which of the following issue agency securities? B. 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). D. A TAC is a variant of a PAC that has a lower degree of extension risk. \begin{array}{c} Posted at 02:28h in espace o diner saint joseph by who has authority over the sheriff in texas combien de fois le mot pardon dans la bible Likes Trading is confined to the primary dealers Thus, average life of the TAC is extended until the arrears is paid. Which statements are TRUE when comparing Companion CMO tranches to plain vanilla CMO tranches? individuals seeking current income, Which of the following are issued with a fixed coupon rate? Each tranche of a CMO, in effect, represents a differing expected maturity, hence each tranche has a different level of market risk. b. the yield to maturity will be higher than the current yield III. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. 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. Which of the following is an original issue discount obligation? CMO issues are more accessible to individual investors than regular pass-through certificatesD. Dealers typically quoted GNMA securities at 50 basis points over equivalent maturity U.S. Government Bonds Treasury STRIP. B. IV. taxable in that year as long term capital gainsD. You have to complete all course videos, modules, and assessments and receive a minimum score of 75% on each assessment to receive credit. IV. Zero Tranche. Federal Farm Credit Funding Corporation Note. 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. Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. IV. I, II, IIID. D. the trade will settle next business day if performed "regular way", the yield to maturity will be higher than the current yield **d.** Nebraska Press Association v. Stuart, $1976$ C. In periods of inflation, the principal amount received at maturity will be par Prepayment speed assumption All of the following statements are true about Treasury Bills EXCEPT: A. the U.S. Treasury issues 1 week T- BillsB. IV. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. FNMA pass through certificates are guaranteed by the U.S. Government U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible. Thus, the PAC class is given a more certain maturity date and hence lower prepayment risk; while the Companion classes have a higher level of prepayment risk if interest rates drop; and they have a higher level of so-called extension risk - the risk that the maturity may be longer than expected, if interest rates rise. On the other hand, extension risk is increased. (31) 3351-3382 | 3351-3272 | 3351-3141 | 3351-3371. puppies for sale in nc under 200 associe-se. Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. 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. a. CMOs are available in $1,000 denominations Which CMO tranche has the least certain repayment date? 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. 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. 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. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. III. C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class In periods of deflation, the amount of each interest payment will decline However, if prepayment rates slow, the TAC absorbs the available cash flow, and goes in arrears for the balance. The service limit is set by Oracle based on the pricing model. I, II, IIIC. purchasing power risk 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). One of the question asked in certification Exam is, Which statement is true about personas? serial structures I Trades bypass the floor broker II Trades can be effected more efficiently and at lower cost III Orders can be accepted up to certain size limits IV Orders can be executed at faster speed I, II, III, and IV III. Agency CMOs carry the direct or implied guarantee of the U.S. Government while Private Label CMOs do not have such a guarantee B. II. 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. Plain vanilla CMO tranches are subject to both prepayment and extension risks. d. Congress, All of the following are true statements about treasury bills EXCEPT: Real Estate Investment TrustD. I. B. If interest rates rise, then homeowners will defer moving at the anticipated rate, since they have a good deal with their existing mortgage. Newest issues of Treasury Notes are issued in: A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. 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. A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. Because these T-Notes are trading at a premium, the yield to maturity will be lower than the current yield. Principal repayments made earlier than that required (earlier than expected) 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. can be backed by sub-prime mortgages Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? They are sold in $100 minimums at a discount to par value, just like Treasury Bills. These are funds payable at a registered clearing house, which are usually not good funds for three business days. which statements are true about po tranches 16 .. Interest is paid before all other tranches All of the following statements are true regarding this trade of T-notes EXCEPT: Therefore, as interest rates move up, the interest rate paid on the tranche goes up as well; and when interest rates drop, the interest rate paid on the tranche goes down as well. A. holders of PAC CMO trances have higher prepayment risk These represent a payment of both interest and principal on the underlying mortgages. I. T-Bills can be purchased directly at weekly auction Which of the following is an original issue discount obligation? This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. PACs are similar to TACs in that both provide call protection against increasing prepayment speedsD. III. I. d. T-bills can be purchased directly at weekly auction, T-bills have a maximum maturity of 9 months, If interest rates rise, which of the following US government debt instruments would show the greatest percentage drop in value? Treasury STRIPS are suitable investments for individuals seeking current income A. c. Ginnie Mae 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. Treasury Receipts, Treasury Bills 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? II. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. D. expected interest rate, The nominal interest rate on a TIPS is: They are the shortest-term U.S. government security, often with maturities as short as 5 days. A 5 year $1,000 par 3 1/2% Treasury Note is quoted at 101-4 - 101-8. C. Municipal bonds 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. Treasury note. Extended maturity risk B. B. purchasing power risk A floating rate CMO tranche is MOST similar to a: The best answer is B. D. Freddie Mac debt issues are directly guaranteed by the U.S. Government. Which statements are TRUE about private CMOs? Government agency securities are quoted in 32nds, similar to U.S. Government securities. Because interest will now be paid for a longer than expected period, the price rises. All of the following trade "and interest" EXCEPT: Which of the following are TRUE statements regarding treasury bills? A TAC bond is designed to pay a target amount of principal each month. Because the principal is being paid back at an earlier date, the price rises. actual maturity of the underlying mortgages. B. II. $.625 per $1,000 B. If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. II. Thus, CMOs give holders a form of call protection not available in regular pass-through certificates. 15 year standard lifeD. PACs protect against prepayment risk, by shifting this risk to an associated Companion tranche. Prepayment rate Sallie Mae is wholly owned by the U.S. Government Trades of which of the following securities will settle in Fed Funds? Thus, the certificate was priced as a 12 year maturity. IV. For the exam, these securities are still rated AAA. 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 Bills are quoted on a yield to maturity basis If prepayments increase, they are made to the Companion class first. II. Treasury Bonds are traded in 32nds A Treasury Bond is quoted at 95-24. The collateral backing private CMOs consists of: A. private placements offered under Regulation DB. When interest rates rise, the interest rate on the tranche fallsD. 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). 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. Commercial banks mortgage backed securities issued by a privatized government agencyD. When interest rates rise, the price of the tranche risesB. March 2, 2023 at 12:39 pm #130296. 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. 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 There were no dividends. B. each tranche has a different yield B. C. in varying dollar amounts every month 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. III. rated based on the credit quality of the underlying mortgages Both securities are sold at a discount 24/32nds = .75, so the bond is quoted at 95.75% of $1,000 par value = $957.50. 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? c. eliminate prepayment risk to holders of that tranche B. The underlying securities are backed by the full faith and credit of the U.S. Government Highland Industries Inc. makes investments in available-for-sale securities. All of the following statements are true about CMOs EXCEPT: A. CMO issues have a serial structureB. CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations. Thus, the certificate was priced as a 12 year maturity. T-Bills trade at a discount from par This is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future. If interest rates drop, homeowners will refinance their mortgages, increasing prepayment rates on CMOs D. Targeted Amortization Class, Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? Thus, the earlier tranches are retired first. Not too shabby. Standard deviation is a measure of the risk based on the expected variation of return on investment. Charity Navigator (https://www.charitynavigator.org) is a website dedicated to providing information regarding not-for-profit charitable organizations. A. PAC tranche