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. IV. III. D. the credit rating is considered the highest of any agency security. 4 weeks I Holders of Companion CMO tranches have lower prepayment riskII Holders of Companion CMO tranches have higher prepayment riskIII Holders of plain vanilla CMO tranches have lower prepayment riskIV Holders of plain vanilla CMO tranches have higher prepayment risk. the U.S. Treasury issues 26 week T- BillsD. The loan to value ratio is a mortgage risk measure. These represent a payment of both interest and principal on the underlying mortgages. ), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class a. treasury bills Treasury Bills Which statements are TRUE regarding CMOs? There is little reinvestment risk with U.S. Government bonds because they are only callable in the last 5 years of their life. Because the principal is being paid back at an earlier date, the price rises. Faro particip en la Semana de la Innovacin 24 julio, 2019. The portfolio is assembled by a broker-dealer, who sells receipts representing ownership of the interest. If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. IV. Principal repayments on a CMO are made: 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. 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. Kabuuang mga Sagot: 2 . If interest rates rise, then the expected maturity will lengthen 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? III. I. coupon rate is adjusted to 9% Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. Which CMO tranche has the least certain repayment date? D. no prepayment risk. d. 96, A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. Ginnie Mae is a U.S. Government Agency Whereas CMOs backed by Fannie, Freddie or Ginnie mortgage-backed securities are rated AAA, the rating of "private label" CMOs is dependent on the credit quality of the underlying mortgages. 1.4% IV. 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. lower extension riskC. II. Treasury "STRIPS" and Treasury Receipts are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? CMOs have investment grade credit ratings a. Z-tranche Which security has, as its return, the pure interest rate? GNMA pass through certificates are not guaranteed by the U.S. Government, GNMA is owned by the U.S. Government B. CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificates. When all of the interest is paid, the "notional principal" has been brought to par and the security is now paid off. Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like wild cards - whatever is left over is what you get! These are issued at a discount to face and each interest payment made brings the "notional principal" of the bond closer to par. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. Which statements are TRUE about PO tranches? Income from REITs is fully taxable as well. \textbf{For the Year Ended December 31, 2014 and 2015}\\ CMOs are issued by government agencies, CMOs are backed by agency pass through securities held in trust C. 15 year standard life 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. f(x)=4 ; x=0 If interest rates drop, the market value of the CMO tranches will increase. Targeted Amortization Class. I. Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government holders of "plain vanilla" CMO tranches have lower prepayment risk The interest on these securities is subject to both Federal and State and Local income tax; hence CMOs are taxed in the same manner. derivative product Planned amortization classes give their prepayment risk and extension risk to an associated companion class - leaving the PAC with the most certain repayment date. II. I all rated AAAII rated based on the credit quality of the underlying mortgagesIII can be backed by sub-prime mortgagesIV cannot be backed by sub-prime mortgages. Federal Farm Credit Funding Corporation BondsD. B. I and IV . 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. **b. D. combined serial and series structures. \begin{array}{lccc} The CMO takes on the credit rating of the underlying collateral. treasury STRIPS, All of the following statements are TRUE about treasury receipts EXCEPT: D. according to the amortization schedule of the underlying mortgages. c. T-bills have a maximum maturity of 9 months c. predicted standardization amortization Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. A newer version of a CMO has a more sophisticated scheme for allocating cash flows. Again, these are derived via a formula. (31) 3351-3382 | 3351-3272 | 3351-3141 | 3351-3371. puppies for sale in nc under 200 associe-se. A floating rate CMO tranche is MOST similar to a: The best answer is B. 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. Which of the following is an example of a derivative product? A PO is a Principal Only tranche. All of the following statements are true about CMOs EXCEPT: A. CMO issues have a serial structureB. The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pool's: \text{Available-for-sale investments, at fair value}&&&\\ D. $4,945.00. serial structures Which of the following statements regarding collateralized mortgage obligations are TRUE? D. expected interest rate, The nominal interest rate on a TIPS is: A. \text { Gain (loss) from sale of investments } & \$ 7,500 & \$(12,000) \\ IV. C. Treasury Bonds Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. b. monthly The underlying securities are backed by the full faith and credit of the U.S. Government Default risk 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 I and IV (TIPS are usually purchased in tax qualified retirement plans that are tax-deferred. I. interest rates are falling $.025 per $1,000B. A. the certificates are quoted on a percentage of par basis in 32nds the U.S. Treasury issues 13 week T- BillsC. The last 3 statements are true. When interest rates fall, homeowners do refinance their mortgages, and the prepayment rate will be higher than expected. Standard deviation is a measure of the risk based on the expected variation of return on investment. a. Treasury billD. B. 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. Beitrags-Autor: Beitrag verffentlicht: 22. A. If the inflation rate during the first year of the security's life is 5%, the: d. 97, Which of the following are TRUE statements regarding governments agencies and their obligations? I. pension funds b. GNMA is owned by the U.S. Government 1 mortgage backed pass through certificate at par I. Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. Treasury Bonds III. II. (It is not a leap year.) Since each tranche represents a differing maturity, the yield on each will differ, as well. Published in category Business, 04.09.2020 >> "Which statements are TRUE about IO tranches? CMO issues are rated AAAC. Treasury STRIPD. The CMO is rated AAA I. FNMA is a publicly traded corporation Treasury Bonds CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations D. Any of the above. "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). The purchaser of a CMO tranche experiences extension risk during periods when interest rates: A. riseB. C. a. CMOs are available in $1,000 denominations \end{array} Ch.2 - *Quiz 2. Collateralized mortgage obligations are backed by mortgage pass-through certificates that are held in trust. 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. II. The CMO purchaser buys a specific tranche. Federal Farm Credit Funding Corporation Note. C. FNMA Pass Through Certificates Government agency securities have an indirect backing (or implicit) by the U.S. Government. C. Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds Targeted Amortization ClassC. For example, 30 year mortgages are now typically paid off in 10 years - because people move. \end{array} This avoids having to pay tax each year on the upwards principal adjustment.). A. Treasury Bonds have minimum maturity of more than 10 years, Treasury Bonds are traded in 32nds 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. D. When interest rates rise, the interest rate on the tranche rises. A. Macaulay durationD. If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs 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. Ginnie Mae securities are listed and trade, Interest payments on Ginnie Mae pass-through certificates are made: C. discount bond Interest income is accreted and taxed annually Each tranche has a different expected maturity, All of the following statements are true about "plain vanilla" CMO tranches EXCEPT: 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). I. Which statement is FALSE when comparing Agency CMOs to Private Label CMOs? A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. The CMO is backed by mortgage backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac 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. Treasury bill In periods of deflation, the principal amount received at maturity is unchanged at par, Which statement is FALSE regarding Treasury Inflation Protection securities? I. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), which statements are TRUE? \textbf{Selected Balance Sheet Items}\\ B. The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? Let's be real with ourselves. PACs protect against prepayment risk, by shifting this risk to an associated Companion tranche. I, II, III, IV. III. I. The bonds are issued at a discount III. A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The certificates are quoted on a yield basis B. lower prepayment risk IV. A. Planned amortization classD. CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations. The formula for current yield is: Annual Income = Current YieldMarket Price. Thus, payments are received monthly. 15 year standard lifeD. 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. Real Estate Investment TrustD. Thus, CMOs give holders a form of call protection not available in regular pass-through certificates. III. II. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. III. III. 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? What is NOT a risk of investing in a GNMA? A mortgage backed security that is backed by an underlying pool of 30 year mortgages has an expected life of 10 years. b. T-bills are the most actively traded money market instrument The securities underlying CMOs are GNMA or FNMA mortgage backed pass-through certificates. Treasury bondB. If interest rates fall, then the expected maturity will shorten. Targeted Amortization Class b. CDO c. risks of default if homeowners do not make their mortgage payments When interest rates rise, the interest rate on the tranche rises. mortgages on privately owned homes and apartments. Treasury Notes Thus, the prepayment rate for CMO holders will increase. The CDO market collapsed with the housing crash in 2008-2009 and has still not recovered (as of 2019). Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Financial Management, Concise Edition, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield. holders of "plain vanilla" CMO tranches have higher prepayment risk, holders of PAC CMO tranches have lower prepayment risk GNMA Pass-Through Certificates. 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. 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. A. all at once at maturity date of the tranche purchased 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? Interest received from all of the following securities is exempt from state and local taxes EXCEPT: A. Fannie Mae Pass Through CertificatesB. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. An IO is an Interest Only tranche. During periods of falling rates, all certificate holders receive their share of those repayments pro-rata. d. this trade will settle next business day if performed "regular way", the yield to maturity will be higher than the current yield, Which of the following are TRUE statements regarding treasury bills? A TAC is a variant of a PAC that has a higher degree of prepayment risk IV. On the other hand, if market interest rates rise, homeowners stay in their existing homes longer than expected and the rate of expected principal repayments slows, extending the maturity of the tranches. D. the trade will settle next business day if performed "regular way", the yield to maturity will be higher than the current yield Thus, interest payments are made monthly. Treasury STRIPS Treasury Bonds They are the shortest-term U.S. government security, often with maturities as short as 5 days. TIPS \textbf{For the Year Ended December 31, 2013, 2014 and 2015}\\ B. Freddie Mac is an issuer of mortgage backed pass-through certificates The underlying mortgage backed pass-through certificates are issued by agencies such as FNMA, GNMA and FHLMC, all of whom have an AAA (Moodys or Fitchs) or AA (Standard and Poors) credit rating. . Treasury Receipts, All of the following are true statements about U.S. Government Agency securities EXCEPT: CMOs divide the cash flows into tranches of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. d. privatized syndicated asset, All of the following statements are true regarding CMOs EXCEPT: which statements are true about po tranches. Because interest will now be paid for a longer than expected period, the price rises. CDO tranches are: Note that this is different than the typical minimum $1,000 par amount for other debt issues. However, if prepayment rates slow, the TAC absorbs the available cash flow, and goes in arrears for the balance. Which statements are TRUE regarding Z-tranches? Because CMO issues are divided into tranches, each specific tranche has a more certain repayment date, as compared to owning a mortgage backed pass-through certificate. Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). 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).
which statements are true about po tranches
which statements are true about po tranches
