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. All of them b. planned securitization alogorithm Fannie Mae issues are not directly backed by the full faith and credit of the U.S. Government, All of the following statements describe Freddie Mac EXCEPT: The CDO market collapsed with the housing crash in 2008-2009 and has still not recovered (as of 2019). IV. \textbf{Selected Balance Sheet Items}\\ D. premium bond. I. Fannie Mae is a publicly traded company However, Interest Only tranche is quite different from a typical bond, simply because when market interest rate increases the rate of prepayment decreases, which in turn makes the rate of maturity to be longer. This prepayment speed assumption is used to guesstimate the expected life of a mortgage backed pass-through certificate. 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? B. The best answer is C. which statements are true about po tranches. Standard deviation is a measure of the risk based on the expected variation of return on investment. Which of the following statements are TRUE about Treasury Receipts? \begin{array}{c} IV. & 2014 & 2015 \\ holders of PAC CMO trances have higher prepayment risk \text{Valuation allowance for available-for-sale investments}&12,000&(11,000)&h.\\ A. CMBs are used to smooth out cash flow I. b. Treasury Notes Planned Amortization Class which statements are true about po tranches February 11, 2022 by 2) After slice and dice into many tranches, in order to sell them, each tranch (product) is manipulated to let it price more than it is actually worth, thus further squeezing additional profits. C. In periods of inflation, the principal amount received at maturity will be par Macaulay durationD. The underlying securities are backed by the full faith and credit of the U.S. Government b. T-bills are the most actively traded money market instrument B. quarterly 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. Sallie Mae is wholly owned by the U.S. Government The note pays interest on Jan 1st and Jul 1st. I, II, IIID. If interest rates are rising rapidly, which U.S. Government debt prices would be MOST volatile? GNMA (Government National Mortgage Association) certificates, Treasury Bonds, and FNMA (Federal National Mortgage Association) bonds are all issued at par and make periodic interest payments. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. B. the guarantee of the U.S. Government The annual accretion amount is taxable, since the underlying securities are U.S. Ginnie MaesD. March 2, 2023 at 12:39 pm #130296. $4,914.06 ), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. III. B. The preparation of the audited annual financial statements of the Group was supervised by Mr M Bosman, CA(SA). Fannie Mae is a U.S. Government Agency When interest rates rise, the interest rate on the tranche rises. 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). 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. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. Series EE bonds have no price volatility since they are non-negotiable. Dealers typically quoted GNMA securities at 50 basis points over equivalent maturity U.S. Government Bonds CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations loan to value ratio. Kabuuang mga Sagot: 2 . The implicit rate of return is locked-in when the security is purchased. A. reduce prepayment risk to holders of that tranche Thus, the earlier tranches are retired first. CMO issues have the same market risk as regular pass-through certificates. From the basis quote, the dollar price is computed. II. C. real interest rate CMOs are packaged and issued by broker-dealers. Ginnie Mae bonds are traded Over the Counter, The "modification" of Ginnie Mae modified pass through certificates is: Sallie MaesB. In periods of deflation, the interest rate is unchanged If interest rates drop, homeowners will refinance their mortgages, increasing prepayment rates on CMOs B. c. taxable in that year as long term capital gains Which statement is TRUE about floating rate tranches? IV. B. U.S. Government Agency bonds A. individuals seeking current income, Which of the following are issued with a fixed coupon rate? 26 weeks Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. III. Conversely, when market interest rates fall, the rate of prepayments rises (prepayment risk) and the maturity shortens. IV. II. c. risks of default if homeowners do not make their mortgage payments PACs protect against extension risk, by shifting this risk to an associated Companion tranche. B. TAC tranche A. Treasury Bills They do have purchasing power risk (the risk of inflation eroding real returns), but this is only an issue for long-term maturities. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. He wants to receive payments over a minimum 10-year investment time horizon. Treasury STRIPS are quoted in 32nds, Which characteristic is NOT common to both Treasury STRIPS and Treasury Notes? \textbf{Highland Industries Inc.}\\ Each tranche has a different level of credit risk 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). Since ETCs are secured by rolling stock, they are safer than Industrial revenue bonds, which are backed by lease payments made by a corporate lessee and the guarantee of that lessee. 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 Ginnie's underwriting standards). Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? can be backed by sub-prime mortgages In periods of inflation, the amount of each interest payment will increase Treasury Bills in varying dollar amounts every month Which statement is TRUE about PO tranches? a. CMOs are available in $1,000 denominations I. 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. CMOs have the highest investment grade credit ratingsD. 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. All pass through certificates pass on the monthly mortgage payments received from the pooled mortgages to the certificate holders. The CMO purchaser buys a specific tranche. A. U.S. Government Agency Securities are quoted in 1/32nds Quoted as a percent of par in 32nds I. d. 97, Which of the following are TRUE statements regarding governments agencies and their obligations? FNMA pass through certificates are guaranteed by the U.S. Government Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). Thus, average life of the TAC is extended until the arrears is paid. Which two statements are true about service limits and usage? Approximately how much will the customer pay, disregarding commissions and accrued interest? CMO investors are subject to which of the following risks? Federal Farm Credit Funding Corporation BondsD. III. However, if prepayment rates slow, the TAC absorbs the available cash flow, and goes in arrears for the balance. Income from REITs is fully taxable as well. 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. Ch.2 - *Quiz 2. 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. Plain vanilla B. interest payments are subject to state and local tax C. Plain Vanilla Tranche II. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. TIPS c. predicted standardization amortization When interest rates rise, the price of the tranche rises If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. I. T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve 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? A. Freddie Mac buys conventional mortgages from financial institutions A. term structures A 5 year 3 1/2% Treasury Note is quoted at 98-4 - 98-9. The spread between the bid and ask is 8/32nds. Governments. a. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. $4,906.25 Companion Federal Reserve $$ This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. $10,000D. d. Congress, All of the following are true statements about treasury bills EXCEPT: These are funds payable at a registered clearing house, which are usually not good funds for three business days. PAC tranche holders have higher extension risk than companion tranche holders. This pool, with say an average life of 12 years, is "chopped-up" into many different tranches, each with a given "expected life." I. Planned Amortization ClassB. This avoids having to pay tax each year on the upwards principal adjustment.). \text{Available-for-sale investments, at cost}&\$90,000&\$86,000&\$102,000\\ A. I When interest rates rise, maturities will lengthenII When interest rates fall, maturities will shortenIII When interest rates rise, holders are subject to prepayment riskIV When interest rates fall, holders are subject to extension risk. Since interest is paid semi-annually, each payment will be for $81.25. The CMO is rated AAA CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations, "PSA" stands for: The certificates are quoted on a percentage of par basis A mortgage-backed security (MBS) that goes through this processseparating the interest and. After reviewing the website, explain how not-for-profit organizations are rated. Prepayment risk T-Bills have a maximum maturity of 2 years However, T-Receipts still trade until they all mature. Fannie Mae debt securities are non-negotiable, Fannie Mae is a publicly traded company Which of the following statements are TRUE about CMOs? Collateralized mortgage obligations are backed by mortgage pass-through certificates that are held in trust. The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. There is little reinvestment risk with U.S. Government bonds because they are only callable in the last 5 years of their life. GNMA pass through certificates are guaranteed by the U.S. Government "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. C. Freddie Mac is a corporation that is publicly traded Collateralized mortgage obligations may be backed by all of the following securities EXCEPT: The loan to value ratio is a mortgage risk measure. B. A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. B. higher prepayment risk, but the same extension risk as a Planned Amortization Class B. the yield to maturity will be higher than the current yield PAC tranches increase prepayment risk to holders of that tranche GNMA is owned by the U.S. Government A. average life of the tranche Treasury securities are the safest investment - they have virtually no credit risk (default risk) and almost no marketability risk. When interest rates rise, the price of the tranche fallsC. II. Treasury bond The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? An exception is the interest income received from mortgage backed pass through certificates (issued by GNMA, FNMA, FHLMC). money market funds Call and put 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. Interest income is accreted and taxed annually IV. A. FRB a. represent a payment of both interest and principal d. TIPS, If the principal amount of a treasury inflation protection security is adjusted upwards due to inflation, the adjustment amount is: The note pays interest on Jan 1 and Jul 1. A. \text{Available-for-sale investments, at fair value}&&&\\ D. expected interest rate, The nominal interest rate on a TIPS is: Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. I. Collateralized mortgage obligation tranches that are available to the public are generally rated: A government securities dealer quotes a 3 month Treasury Bill at 5.00 Bid - 4.90 Ask. GNMA pass through certificates are guaranteed by the U.S. Government, All of the following statements are true about the Government National Mortgage Association Pass-Through Certificates EXCEPT: 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. holders of "plain vanilla" CMO tranches have higher prepayment risk, holders of PAC CMO tranches have lower prepayment risk Treasury bill prices are falling A collateralized mortgage obligation is best defined as a derivative product. All of the following statements are true about Treasury Bills EXCEPT: A. the U.S. Treasury issues 1 week T- BillsB. Holders of CMOs receive interest payments: A. monthlyB. General Obligation Bonds Which CMO tranche has the least certain repayment date? vs. FedEx Express), some human resource departments administer standard IQ tests to all employees. Treasury NoteC. A. collateral trust certificateB. The annual accretion amount is subject to Federal income tax each year, as the underlying securities are U.S. All of the following securities would be used as collateral for a collateralized mortgage obligation EXCEPT: A. If the maturity shortens, then for a given fall in interest rates, the price will rise slower. The interest coupons are sold off separately from the principal portion of the obligation d. Savings (EE) bonds, All of the following agencies provide financing for residential housing EXCEPT: I CMO prices fall slower than similar maturity regular bond pricesII CMO prices fall faster than similar maturity regular bond pricesIII The expected maturity of the CMO will lengthen due to a slower prepayment rate than expectedIV The expected maturity of the CMO will lengthen due to a faster prepayment rate than expected. PACs protect against prepayment risk, by shifting this risk to an associated Companion tranche. II. 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. Treasury STRIP When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), which statements are TRUE? Hence the true statements are: The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pools: A. standard deviation of returnsB. If a customer buys 5 T-notes on Monday, Mar 31st in a regular way trade, how many days of accrued interest are owed to the seller? $$, Which of the following court decisions restricted the ability of public officials to sue the press for libel? B. Thus, the PAC is given a more certain repayment date; while the CMO is given the least certain repayment date. Which statements are TRUE regarding Treasury debt instruments? Ginnie Mae issues are not directly backed by the full faith and credit of the U.S. Government When all of the interest is paid, the notional principal has been brought to par and the security is now paid off. Let's be real with ourselves. b. CDO A copy of the full audited annual financial statements is available on or may be requested from the company secretary ([email protected], tel +27 (0) 21 980 4284) at PO Box 215, Brackenfell, 7561, South Africa. 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). I. through a National Securities Clearing Corporation II. $25 per $1,000. A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. Which statements are TRUE about IO tranches? Finally, each American Depositary Receipt represents a fixed number of foreign shares held in trust. Plain VanillaC. U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible. Which of the following statements are TRUE regarding Treasury Stock? D. Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds. A. higher prepayment risk Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government Losses are first absorbed by the most junior (lower) classes. C. more than the rate on an equivalent maturity Treasury Bond D. In periods of inflation, the principal amount received at maturity is more than par. Thus, the earlier tranches are retired first. D. no prepayment risk. If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. Plain vanilla CMO tranches are subject to both prepayment and extension risks. 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. D. Freddie Mac debt issues are directly guaranteed by the U.S. Government. rated based on the credit quality of the underlying mortgages The PAC class has a lower level of prepayment risk than the Companion class, Which statement is TRUE about a Targeted Amortization Class (TAC)? II. Because they trade, the liquidity risk aspect of structured products is eliminated. II. The CMO takes on the credit rating of the underlying collateral. a. CMBs This makes CMOs more accessible to small investors. We are not the CEOs. are made monthly Planned Amortization ClassB. B. A customer who wishes to buy 1 Treasury Bill will pay: The best answer is A. A mortgage backed security that is backed by an underlying pool of 30 year mortgages has an expected life of 10 years. 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). B. the certificates are available in $1,000 minimum denominations chelcee grimes wedding pictures; Then it is paid off at par. Thus, the prepayment rate for CMO holders will increase. CMO "Planned Amortization Classes" (PAC tranches): I. coupon rate is adjusted to 9% A companion tranche is a class, or type, of tranche, which is a portion of a debt or security. Treasury Bonds have minimum maturity of more than 10 years, Which investment does NOT have purchasing power risk? 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. which statements are true about po tranches. Principal repayments made later than expected are applied to the PAC prior to being applied to the Companion tranche. ** New York Times v. United States, $1974$ D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. If interest rates rise, then the expected maturity of a CMO tranche will lengthen, due to a lower prepayment rate than expected. A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. a. prepayment speed assumption 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). GNMA securities are guaranteed by the U.S. Government. 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. I. B. Treasury Bonds are quoted at a discount to par value III. Not too shabby. There were no dividends. D. Companion tranche. b. the yield to maturity will be higher than the current yield

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