B. interest payments are subject to state and local tax The CMO takes on the credit rating of the underlying collateral. 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 d. privatized syndicated asset, All of the following statements are true regarding CMOs EXCEPT: \textbf{Selected Income Statement Items}\\ b. taxable in that year as interest income received I. through a National Securities Clearing Corporation Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Treasury bill C. U.S. Government bond II. IV. Principal is paid after all other tranches, Interest is paid after all other tranches 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. I. B. security which is backed by the full faith, credit, and taxing power of the U.S. Government No certificates are issued for book entry securities; the only ownership record is the "book" of owners kept by the transfer agent. What is NOT a risk of investing in a GNMA? 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? Selected income statement items for the years ended December 31, 2014 and 2015, plus selected items from comparative balance sheets, are as follows: II. Tranches onward. Treasury STRIPS are suitable investments for individuals seeking current income Ginnie Mae CertificateC. A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. Which statements are TRUE regarding collateralized mortgage obligations? The CMO is rated AAA Thus, the certificate was priced as a 12 year maturity. B. the certificates are available in $1,000 minimum denominations II and III onlyC. It gets no payments until all prior tranches are retired. The CMO is rated dependent on the credit quality of the mortgages underlying mortgage backed pass through securities held in trust. D. Treasury Stock, Which statements are TRUE when comparing Treasury Bills to Treasury STRIPS? The certificates are quoted on a yield basis 1 / 39 The best answer is B. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. 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 trade "flat" ? Companion ClassD. The note pays interest on Jan 1st and Jul 1st. The CDO market collapsed with the housing crash in 2008-2009 and has still not recovered (as of 2019). CMO holders receive monthly payments derived from the underlying mortgage backed pass-through certificates. coupon rate remains at 4% You have to complete all course videos, modules, and assessments and receive a minimum score of 75% on each assessment to receive credit. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. There is no such thing as an AAA+ rating; AAA is the highest rating available. II. The holder is not subject to reinvestment risk, Which of the following statements are TRUE about Treasury Receipts? I. Determine the missing lettered items. The underlying securities are backed by the full faith and credit of the U.S. Government Government agency securities are quoted in 32nds, similar to U.S. Government securities. treasury bonds Treasury Receipts are a zero-coupon obligations that must be accreted annually for tax purposes. I, II, III, IV. The holder is not subject to reinvestment risk, Treasury STRIPS are not suitable investments for individuals seeking current income If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs Principal repayments made later than expected are applied to the PAC prior to being applied to the Companion tranche. The note pays interest on Jan 1 and Jul 1. B. U.S. Government Agency bonds Ginnie Mae stock is traded on the New York Stock Exchange represent a payment of both interest and principal 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. IV. He wants to receive payments over a minimum 10-year investment time horizon. Treasury billD. 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. A $1,000 par Treasury Note is quoted at 101-3 - 101-5. This is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future. IV. What type of bond offers a "pure" interest rate? Tranches onward Flashcards | Quizlet Which of the following is an example of a derivative product? During periods of falling rates, all certificate holders receive their share of those repayments pro-rata. T-Bills are issued at a discount from par. D. Treasury Receipts. Quiz #1 Flashcards by Candace Houghton | Brainscape Treasury STRIPS are quoted on a yield to maturity basis, Treasury Bills are quoted on a yield to maturity basis The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. A. (TIPS are usually purchased in tax qualified retirement plans that are tax-deferred. Private CMOs (Collateralized Mortgage Obligations) are also called private label CMOs. 26 weeks $$ I. All of the following would be considered examples of derivative products EXCEPT: D. Targeted Amortization Class, Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? A derivative product is one whose value is "derived" via a "formula" from an underlying investment. The Companion class is given a more certain maturity date than the PAC class C. certificates are issued in minimum units of $25,000 c. PAC tranche III. mutual fund. C. more than the rate on an equivalent maturity Treasury Bond which statements are true about po tranches. 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. Federal Home Loan Bank Bonds. The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? Governments, on which accrued interest is computed on an actual day month/actual day year basis, Agency securities' accrued interest is computed on a 30 day month/360 day year basis. A mortgage-backed security (MBS) that goes through this processseparating the interest and. b. planned securitization alogorithm 8/32nds = 1/4th = .25% of $1,000 par = $2.50. I, II, IIID. A TAC is a variant of a PAC that has a lower degree of prepayment risk Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificates. 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? b. CMOs have the highest investment grade credit ratingsD. Contract settlement by cash has different economic effects from those of a settlement by delivery. Browse over 1 million classes created by top students, professors, publishers, and experts. I. A. Freddie Mac buys conventional mortgages from financial institutions A. zero coupon bond II. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations. B. Non- deliverable forwards and contracts for differences have distinct settlement procedures. 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. B. each tranche has a different yield The preparation of the audited annual financial statements of the Group was supervised by Mr M Bosman, CA(SA). I. The holder of a specific tranche of a CMO will only receive prepayments after all earlier tranche holders are repaid. "Which statements are TRUE about IO tranches? I When interest rates Which of the following statements are TRUE regarding CMOs? IV. holders of "plain vanilla" CMO tranches have higher prepayment risk, holders of PAC CMO tranches have lower prepayment risk 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. C. Freddie Mac is a corporation that is publicly traded Treasury Bills are quoted on a yield to maturity basis If the maturity shortens, then for a given fall in interest rates, the price will rise slower. 90 B. IV. B. lower prepayment risk Which statements are TRUE about PO tranches? II. FHLB, A collateralized mortgage obligation is best defined as a(n): Payments to holders of Ginnie Mae pass-through certificates: B. serial structures d. Freddie Mae, Which of the following would NOT purchase STRIPS? Planned Amortization Class Sallie Mae stock does not trade, Sallie Mae is a privatized agency which statements are true about po tranches - Entredad.com Prepayment rate II. & 2014 & 2015 \\ 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. How many inches long is a 6236 \frac{2}{3}632-yard roll of aluminium foil? A. Fannie Mae CertificateB. I. The best answer is C. A PO is a Principal Only tranche. Interest rate risk, 140 Basis points equal: D. combined serial and series structures. Treasury STRIPS B. Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. which statements are true about po tranches The spread is: A. Each tranche has a different expected maturity, Each tranche has a different level of market risk Treasury Bonds TIPS a. B. U.S. Government Agency bonds If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. Treasury bond Do not confuse this with the average life of the mortgages in the pool that backs the CMO. An IO is an Interest Only tranche. Real Estate Investment Trusts $10,000D. 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? A. When market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. b. the yield to maturity will be higher than the current yield The current yield does not factor in the loss of the premium over the life of the bond, whereas yield to maturity does. B. In periods of deflation, the principal amount received at maturity is unchanged at par, Which statement is FALSE regarding Treasury Inflation Protection securities? Which of the following statements are TRUE regarding Treasury Stock? Both securities pay interest at maturity, The physical securities which are the underlying collateral for Treasury Receipts are: These are funds payable at a registered clearing house, which are usually not good funds for three business days. Conversely, when interest rates fall (prepayment risk) the principal is being paid back at an earlier than expected date, so less interest is being received and the price falls (if interest rates fall drastically, the holder might get less interest back than what was originally invested). Default risk **c.** United States v. Nixon, $1974$ March 2, 2023 at 12:39 pm #130296. on the business day after trade date, through the Federal Reserve System 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. The PAC class has a lower level of prepayment risk than the Companion class, Which statement is TRUE about a Targeted Amortization Class (TAC)? III. d. TIPS, If the principal amount of a treasury inflation protection security is adjusted upwards due to inflation, the adjustment amount is: I. Because the principal is being paid back at a later date, the price falls. IV. A customer with $50,000 to invest could buy 2 of these certificates at par. when interest rates fall, prepayment rates fall, when interest rates rise, prepayment rates fall Treasury Bills are original issue discount obligations. Bond classes can be categorised as senior tranches or subordinated (junior) tranches. ), Fannie Mae (Federal National Mortgage Assn. Regular way trades of U.S. Government bonds settle: which statements are true about po tranches This interest income is subject to both federal income tax and state and local tax. 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. Both PACs and TACs offer the same degree of protection against extension riskB. When this interest is received by the certificate holder, both the federal and state government want to recapture this interest income and tax it. Targeted Amortization Class a. not taxable Treasury Bills are typically issued for which of the following maturities? IV. I. CMOs are backed by agency pass through securities held in trust Federal income tax onlyB. Interest Rate I. CMOs make payments to holders monthly $100,000. The implicit rate of return is locked-in when the security is purchased. When interest rates rise, the price of the tranche risesC. c. PAC tranche Treasury bill 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. 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. Instead of being backed by mortgages guaranteed by Fannie, Freddie or Ginnie, they are backed by private label mortgages - meaning mortgages that do not qualify for sale to these agencies (either because the dollar amount of the mortgage is above their purchase limit or they do not meet Fannie, Freddie or Ginnies underwriting standards). which statements are true about po tranches Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Financial Management, Concise Edition, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield. PAC tranche holders have lower prepayment risk than companion tranche holdersD. B. CMBs are sold at a discount to par which statements are true about po tranches Treasury Notes asked Jul 31, 2019 in Agile by sheetalkhandelwal. III. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. CDOs - Collateralized Debt Obligations - are structured products that invest in CMO tranches (and they can also invest in other debt obligations that provide cash flows). 4 weeks Science, 28.10.2019 21:29, nicole8678. When interest rates rise, the interest rate on the tranche rises. 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 Principal is paid after all other tranches, A floating rate CMO tranche is MOST similar to a: the same level of extension riskD. The CMO is backed by mortgage backed securities created by a bank-issuer A Treasury Bond is quoted at 95-24. chelcee grimes wedding pictures; D. CMBs are direct obligations of the U.S. government. 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). market value CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations. a. GNMA is empowered to borrow from the treasury to pay interest and some principal if necessary Treasury bill prices are falling Ch.2 - *Quiz 2. A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. $25 per $1,000. Users should NOT be allowed to delete review records after job application records have been approved. Which of the following statements regarding collateralized mortgage obligations are TRUE? The PAC class is given a more certain maturity date than the Companion class Its price moves just like a conventional long term deep discount bond. All government and agency securities are quoted in 32nds IV. When the bond matures, the holder receives the higher principal amount. Prepayment risk T-Bills trade at a discount from par CMO issues are rated AAAC. Which statements are TRUE about private CMOs? Thus, PACs have lower prepayment risk than plain vanilla CMO tranches. Furthermore, as interest rates drop, the value of the fixed income stream received from those mortgages increases, so the market value of the security will increase. IV. 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. The CDO market boomed until 2007 and then crashed and burned with the housing collapse of 2008-2009, when CDO holders discovered that their supposedly "lower risk" tranches defaulted. Arrange the following CMO tranches from lowest to highest yield: II rated based on the credit quality of the underlying mortgages. CMO Targeted Amortization Classes (TACs) have: PAC tranche holders have higher extension risk than companion tranche holders. I when interest rates fallII when interest rates riseIII so they can refinance at lower ratesIV so they can refinance at higher rates. The purchaser of a CMO tranche experiences extension risk during periods when interest rates: A. riseB. principal amount remains at $1,000. c. Office of the Comptroller of Currency Newer CMOs divide the tranches into PAC tranches and Companion tranches. IV. B. interest payments are exempt from state and local tax \textbf{Highland Industries Inc.}\\ 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. Which statements are TRUE about IO tranches?Which statements are TRUE about IO tranches? Plain vanillaB. "Which statements are TRUE about IO tranches? I When - en.ya.guru Which security has, as its return, the pure interest rate? Not too shabby. 78 weeks, $100 is the minimum denomination for all of the following EXCEPT: Riverstone Energy Announcement. A. higher prepayment risk a. Z-tranche 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. This is a serial structure. CMOs have investment grade credit ratings The securities are purchased at a discount derivative product 1. Which CMO tranche has the least certain repayment date? III. II. 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). A. GNMA certificate b. they are "packaged" by broker-dealers 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. pasagot po. 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. A customer who wishes to buy will pay the "Ask" of 4.90. TACs are like a one-sided PAC - they protect against prepayment risk, but not against extension risk. 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. General Obligation Bond FNMA pass through certificates are not guaranteed by the U.S. Government, FNMA is a publicly traded corporation U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible. A government securities dealer quotes a 3 month Treasury Bill at 5.00 Bid - 4.90 Ask. A. equity security III. B. mortgage backed securities created by a bank-issuer a. If interest rates rise, then the expected maturity will lengthen Interest is paid before all other tranches Principal Only Strips (PO Strips) Definition - Investopedia Which statement is TRUE about floating rate tranches? expected life of the tranche III. Federal, State and Local income tax. A. corporation or trust through which investors pool their money in order to obtain diversification and professional management 1 mortgage backed pass through certificate at par A customer has heard about the explosive growth in China and wants to make . A Targeted Amortization Class (TAC) is a variant of a PAC. Companion Tranche Definition - Investopedia 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. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). Which of the following statements are TRUE about computerized trading of securities on exchanges? are made monthly B. The longer the maturity, the greater the price volatility of a negotiable debt instrument. B. prepayment speed assumption Because interest will now be paid for a longer than expected period, the price rises. b. CMOs make payments to holders monthly 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 Although controversial and the subject of recent lawsuits (e.g., Satchell et al. (It is not a leap year). For most investors this is too much money to invest, so they buy shares of a Ginnie Mae mutual fund instead. Government bond trades settle next business day; accrued interest is computed on an actual month/actual year basis; and trades settle through the Federal Reserve system in "Fed Funds. This prepayment speed assumption is used to guesstimate the expected life of a mortgage backed pass-through certificate. which statements are true about po tranches - Qocitsupport.com Payment is to be made in: Which is considered to be a direct obligation of the US government? 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. B. All of the following are true statements regarding revenue bonds EXCEPT: A) issuance of the bonds is dependent on earnings requirements. Interest is paid after all other tranches 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. III. 2 mortgage backed pass through certificates at par D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis. Ginnie Mae bonds are traded Over the Counter, Ginnie Mae is a U.S. Government Agency rated based on the credit quality of the underlying mortgages There are no new T-Receipt issues coming to market. Thus, average life of the TAC is extended until the arrears is paid. B. a dollar price quoted to a 5.00 basis The U.S. Treasury issues 4 week, 13 week, 26 week, and 52 week T-Bills at a discount from par. T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve A. This avoids having to pay tax each year on the upwards principal adjustment.). When interest rates fall, homeowners do refinance their mortgages, and the prepayment rate will be higher than expected. 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. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. prepayment speed assumptionC. These are also not a derivative product. A. FRB Treasury Receipts, Treasury Bills The service limit is set by administrators to allow users to use the required resources. 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? Agency CMOs carry the direct or implied guarantee of the U.S. Government while Private Label CMOs do not have such a guarantee There is usually a cap on how high the rate can go and a floor on how low the rate can drop.