which statements are true about po tranches

1.4% Yield quotes on CMOs are based on the expected life of the tranche that is quoted. Each receipt is, essentially, a zero-coupon obligation, that is purchased at a discount, and which is redeemable at par at a pre-set date. When interest rates rise, the price of the tranche rises 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. b. floating rate tranche The PAC, which is relieved of these risks, is given the most certain repayment date. But we've saved 90% of the people and identified most of the alien overlords and their centers. III. CMOs are available in $1,000 denominations. III. d. 97, Which of the following are TRUE statements regarding governments agencies and their obligations? There is no such thing as an AAA+ rating; AAA is the highest rating available. II. on the business day after trade date, through the Federal Reserve System 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? Thus, PACs have lower prepayment risk than plain vanilla CMO tranches. coupon rate remains at 4% CMO investors are subject to which of the following risks? A. CMBs are used to smooth out cash flow IV. Which statements are TRUE about PO tranches? 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. 0. which statements are true about po tranches It is primarily associated as a tranche of a collateralized mortgage obligation (CMO), which also. Duration is a measure of bond price volatility. The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. taxable at maturity. a. weekly The securities are purchased at a discount quarterlyC. II. Federal Home Loan Bank Bonds. Governments. II. Which statements are TRUE regarding CMOs? when interest rates fall, prepayment rates fall, when interest rates rise, prepayment rates fall Treasury bill The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. Thus, when interest rates rise, prepayment risk is decreased. b. Therefore, both PACs and TACs provide call protection against prepayments during period of falling interest rates. Trading is confined to the primary dealers When interest rates rise, the interest rate on the tranche falls. If interest rates rise, then homeowners will defer moving at the anticipated rate, since they have a good deal with their existing mortgage. PAC tranche holders have lower prepayment risk than companion tranche holdersD. We are not the heroes of the narrative. d. TIPS, If the principal amount of a treasury inflation protection security is adjusted upwards due to inflation, the adjustment amount is: 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. Which of the following statements regarding the settlement of forward contracts is correct? Options are the most basic derivative - option values are derived from the price movements of the underlying stock, in addition to time premiums on the contracts. Which statement is TRUE about PO tranches? The Federal Reserve allows commercial banks (such as Citibank and J.P. Morgan Chase); domestic broker-dealers (such as Goldman Sachs); and foreign broker-dealers (such as Daiwa Securities and Nomura Securities); and foreign banks such as Royal Bank of Scotland; to be primary dealers. A customer has heard about the explosive growth in China and wants to make . General Obligation Bonds The CMO is backed by mortgage backed securities created by a bank-issuer I. T-Bills can be purchased directly at weekly auction A. reduce prepayment risk to holders of that tranche ** New York Times v. United States, $1974$ If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. Interest payments on CMOs are 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). 90 A. D. the setting of a fixed interest rate for the pool of mortgages backing the security, A pass through certificate is best described as a: II. A. when interest rates rise, prepayment rates fall 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. The process of separating the principal and interest on a debt obligation is known as stripping. Regarding the Student Loan Marketing Association (Sallie Mae) which of the following statements are TRUE? Principal repayments made earlier than expected are applied to the PAC prior to being applied to the Companion tranche 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 d. the credit rating is considered the highest of any agency security, interest payments are exempt from state and local taxes, Which of the following are TRUE regarding collateralized mortgage obligations? 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. B. U.S. Government Agency bonds Companion 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. \text{Valuation allowance for available-for-sale investments}&12,000&(11,000)&h.\\ Contract settlement by cash has different economic effects from those of a settlement by delivery. This "prepayment speed assumption" is used to "guesstimate" the expected life of a mortgage backed pass-through certificate. Browse over 1 million classes created by top students, professors, publishers, and experts. II. II. However, if prepayment rates slow, the TAC absorbs the available cash flow, and goes in arrears for the balance. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. Again, these are derived via a formula. A Targeted Amortization Class (TAC) is like a PAC, but is only buffered for prepayment risk by the Companion; it is not buffered for extension risk. I CMOs are backed by agency pass-through securities held in trustII CMOs have investment grade credit ratingsIII CMOs give the holder a limited form of call protection that is not present in regular pass-through obligationsIV CMOs are issued by government agencies. Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. Thus, the prepayment rate for CMO holders will increase. D. according to the amortization schedule of the underlying mortgages. b. CDO which statements are true about po tranches. A customer who wishes to buy 1 Treasury Bill will pay: The best answer is A. Which of the following securities has the lowest level of credit risk? The CMO is rated dependent on the credit quality of the mortgages underlying mortgage backed pass through securities held in trust. Holders of CMOs receive interest payments: A. monthlyB. GNMA is owned by the U.S. Government C. FNMA Pass Through Certificates I when interest rates fallII when interest rates riseIII so they can refinance at lower ratesIV so they can refinance at higher rates. IV. Freddie MacsC. Then it is paid off at par. A. collateral trust certificateB. Targeted Amortization Class. Thus, the certificate was priced as a 12 year maturity. I, II, III, IV. 8 Q Accrued interest on the certificates is computed on a 30 day month / 360 day year basis, The certificates are quoted on a percentage of par basis 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. B. security which is backed by the full faith, credit, and taxing power of the U.S. Government On the other hand, extension risk is decreased. b. monthly Each tranche of a CMO, in effect, represents a differing expected maturity, hence each tranche has a different level of market risk. The CMO takes on the credit rating of the underlying collateral. However, T-Receipts still trade until they all mature. taxable in that year as interest income receivedC. II. B. the yield to maturity will be higher than the current yield These are issued at a deep discount to face. 29 terms. A. receives payments prior to all other tranchesB. C. CMBs are sold at a regular weekly auction Plain Vanilla TrancheD. c. 95 D. When interest rates rise, the interest rate on the tranche rises, When interest rates rise, the price of the tranche falls, Which statement is TRUE about IO tranches? I. d. TAC tranche, Which statement is FALSE about CMBs? When interest rates rise, the interest rate on the tranche rises. 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. 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. Therefore, as 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 as well. This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. Governments. CMOs are packaged and issued by broker-dealers. C. Companion Class 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 If prepayments increase, they are made to the Companion class first. D. CMBs are direct obligations of the U.S. government. Each tranche has a different level of credit risk I. CMOs are backed by agency pass through securities held in trust II. expected life of the tranche on the business day after trade date, A customer buys 5M of 3 1/4% Treasury Bonds at 98-8. A 70-year old customer who is looking for current income has inquired about purchasing a GNMA pass-through certificate because he has heard that it provides monthly payments. Interest rate risk, 140 Basis points equal: I. III. Beitrags-Autor: Beitrag verffentlicht: 22. A "derivative" product is one whose value is "derived" via a "formula" from an underlying investment. What is NOT a risk of investing in a GNMA? I. the trading market is very active, with narrow spreads B. quarterly The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pools: A. standard deviation of returnsB. What type of bond offers a "pure" interest rate? Which statements are TRUE when comparing Companion CMO tranches to plain vanilla CMO tranches? $10,000D. d. 96, A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. Sallie Mae stock is listed and trades, Which of the following issue agency securities? a. CMO 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. These represent a payment of both interest and principal on the underlying mortgages. 15 year standard lifeD. A mortgage-backed security (MBS) that goes through this processseparating the interest and. GNMA securities are guaranteed by the U.S. Government. a. prepayment speed assumption I. A companion tranche is a class, or type, of tranche, which is a portion of a debt or security. Note, however, that the "PSA" can change over time. Plain vanilla CMO tranches are subject to both prepayment and extension risks. Which statements are TRUE about PO tranches? c. T-bills have a maximum maturity of 9 months CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. holders of "plain vanilla" CMO tranches have higher prepayment risk, Which CMO tranche is most susceptible to interest rate risk? Fannie Mae debt securities are non-negotiable, Fannie Mae is a publicly traded company 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. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A. For example, 30 year mortgages are now typically paid off in 10 years - because people move. I. \text{Available-for-sale investments, at fair value}&&&\\ A. term structures I, II, III, IV. B. If interest rates fall, then the expected maturity will shorten. Income from REITs is fully taxable as well. 19-29 Cash Flows for GNMA IO and PO 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? Thus, because the PAC has lowered prepayment and extension risk, its yield will be lower than the surrounding Companion classes. Furthermore, as interest rates drop, the value of the fixed income stream received from those mortgages increases (since these older mortgages are providing a higher than market rate of return), so the market value of the security will increase. D. Guaranteed by the U.S. Government, Which of the following statements are TRUE about the Government National Mortgage Association (GNMA)? Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. A. The logic behind this tax treatment is that the mortgage interest paid by the homeowners was fully deductible from both federal, state, and local taxes. Agency obligations have the direct backing of the US government IV. Which of the following statements are TRUE regarding GNMA "Pass Through" Certificates? Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranchesB. II. Ginnie Mae issues are not directly backed by the full faith and credit of the U.S. Government B. Which statements are TRUE about private CMOs? A mortgage backed security that is backed by an underlying pool of 30 year mortgages has an expected life of 10 years. TACs are like a one-sided PAC - they protect against prepayment risk, but not against extension risk. D. yearly, Wide swings in market interest rates would affect which of the following for holders of collateralized mortgage obligations? A customer buys 5M of the notes. Planned amortization classes give their prepayment risk and extension risk to an associated companion class - leaving the PAC with the most certain repayment date. This is the discount earned over the life of the instrument. ), Fannie Mae (Federal National Mortgage Assn. 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 Bonds are quoted at a discount to par value CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificates. reduce prepayment risk to holders of that tranche D. Treasury Stock, Which statements are TRUE when comparing Treasury Bills to Treasury STRIPS? PAC tranches increase prepayment risk to holders of that tranche III. I. FNMA is a publicly traded corporation B. each tranche has a different yield The Companion class has a lower level of prepayment risk than the PAC class, The PAC class is given a more certain maturity date than the Companion class FHLB, A collateralized mortgage obligation is best defined as a(n): II. CMOs are Collateralized Mortgage Obligations. The interest portion of a fixed rate mortgage makes larger payments in the early years, and smaller payments in the later years. There are no new T-Receipt issues coming to market. 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. Yield quotes for collateralized mortgage obligations are based upon: These are issued at a discount to face and each interest payment made brings the "notional principal" of the bond closer to par. B. lower prepayment risk Money market instrumentB. 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? Charity Navigator (https://www.charitynavigator.org) is a website dedicated to providing information regarding not-for-profit charitable organizations. PAC tranches reduce prepayment risk to holders of that tranche D. Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. $4,914.06 $$ If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. C. series structures For example, 30 year mortgages are now typically paid off in 10 years - because people move. Salesforce 401 Dev Certification Questions Answers Part 1. Treasury bill prices are rising, interest rates are falling D. $6.25 per $1,000. If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. IV. I. T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. $$, Which of the following court decisions restricted the ability of public officials to sue the press for libel? A. Certificates are issued in minimum $25,000 denominations. FNMA pass through certificates are not guaranteed by the U.S. Government, Which of the following are TRUE statements regarding government agencies and their obligations? I. All of the tranches are issued on the same date; but the maturities extend over a sequence of years. C. real interest rate Domestic broker-dealers D. Targeted Amortization Class, Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? Conventional Treasury Bonds are subject to this risk, since interest payments are received semi-annually. Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. Federal income tax onlyB. a. I. Fannie Mae is a publicly traded company The holder is not subject to reinvestment risk, Which of the following statements are TRUE about Treasury Receipts? a. GNMA is empowered to borrow from the treasury to pay interest and some principal if necessary \end{array} The interest coupons are sold off separately from the principal portion of the obligation The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? Thus, when interest rates fall, prepayment risk is increased. Treasury note. Again, these are derived via a formula. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. Do not confuse this with the "average life" of the mortgages in the pool that backs the CMO. If prepayment rates rise, the PAC tranche will receive its sinking fund payment after its companion tranchesC. Treasury STRIPS are suitable investments for individuals seeking current income A. Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. Which of the following statements are TRUE about computerized trading of securities on exchanges? C. $162.50 Because the principal is being paid back at an earlier date, the price rises. IV. The note pays interest on Jan 1 and Jul 1. D. A TAC is a variant of a PAC that has a lower degree of extension risk. 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. 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 are quoted in 32nds, similar to U.S. Government securities. b. T-bills are the most actively traded money market instrument C. Plain Vanilla Tranche \text{Retained earnings}&\$175,400&\$220,000&\\ Besides, these portions of bonds or mortgages have varying amounts of risk and maturity. collateralized mortgage obligationD. The service limit is set by administrators to allow users to use the required resources. Treasury Notes II. CMBs are sold at a regular weekly auction II. d. Congress, All of the following are true statements about treasury bills EXCEPT: All of the following statements are true about "plain vanilla" CMO tranches EXCEPT: A. each tranche has a different maturity B. each tranche has a different yield C. each tranche has a different credit rating D. each tranche has a different level of interest rate risk. \textbf{Selected Income Statement Items}\\ FHLMC I. Treasury Bonds When interest rates rise, prepayment rates rise $35.00 Accrued interest on the certificates is computed on an actual day month / actual day year basis When interest rates rise, the price of the tranche rises Thus, the certificate was priced as a 12 year maturity. Ginnie Mae CertificateC. Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? IV. All of the following are true statements regarding Treasury Bills EXCEPT: A. T-Bills are issued in bearer form in the United States B. T-Bills are registered in the owner's name in book entry form C. T-Bills are issued at a discount D. T-Bills are non-callable. 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. 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? IV. On the other hand, extension risk is increased. If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. asked Jul 31, 2019 in Agile by sheetalkhandelwal. I. Ginnie Mae is a publicly traded company actual maturity of the underlying mortgages. 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. 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). B. serial structures III. serial structures Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like "wild cards" - whatever is left over is what you get! 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 Therefore, both PACs and TACs provide "call protection" against prepayments during period of falling interest rates. c. taxable in that year as long term capital gains on the same day as trade date III. IV. IV. Each tranche has a different expected maturity, Each tranche has a different level of market risk "Plain vanilla" CMOs are relatively simple - as payments are received from the underlying mortgages, interest is paid pro-rata to all tranches; but principal repayments are paid sequentially to the first, then second, then third tranche, etc. Thus, the earlier tranches are retired first. The other agencies are only implicitly backed. Corporate and municipal bond trades settle in clearing house funds. PACs are similar to TACs in that both provide call protection against increasing prepayment speedsD. Principal repayments on a CMO are made: A. the same as the rate on an equivalent maturity Treasury Bond