PACs protect against extension risk, by shifting this risk to an associated Companion tranche. 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. If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranchesB. Which CMO tranche will be offered at the highest yield? 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? The note pays interest on Jan 1st and Jul 1st. Securities and Exchange Commission Mortgage backed pass-through certificates are "paid off" in a shorter time frame than the full life of the underlying mortgages. I When interest rates rise, the price of the tranche falls II When interest rates rise, the price of the tranche rises III When interest rates fall, the price of the tranche falls IV When interest rates fall, the price of the tranche rises" II. Do not confuse this with the average life of the mortgages in the pool that backs the CMO. market value All of the following statements are true regarding this trade of T-Notes EXCEPT: which statements are true about po tranches. I TAC tranches protect against prepayment riskII TAC tranches do not protect against prepayment riskIII TAC tranches protect against extension riskIV TAC tranches do not protect against extension risk. When interest rates rise, the price of the tranche rises D. security which gives the holder an undivided interest in a pool of mortgages, security which gives the holder an undivided interest in a pool of mortgages, A customer with $50,000 to invest could buy: Interest Rate II. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. D. GNMA Pass Through Certificates. Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. General Obligation Bonds Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. Payments to holders of Ginnie Mae pass-through certificates: Sallie Mae stock does not trade, Sallie Mae is a privatized agency II. b. monthly When all of the interest is paid, the "notional principal" has been brought to par and the security is now paid off. \textbf{Highland Industries Inc.}\\ can be backed by sub-prime mortgages When compared to plain vanilla CMO tranches, Planned Amortization Classes have: The note pays interest on Jan 1st and Jul 1st. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. c. PAC tranche III. A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. a. CMO A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. Accrued interest on the certificates is computed on a 30 day month / 360 day year basis, All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT: 15 year standard lifeD. I. through a National Securities Clearing Corporation Salesforce 401 Dev Certification Questions Answers Part 1. D. Collateral trust certificate, Treasury bond d. privatized syndicated asset, All of the following statements are true regarding CMOs EXCEPT: treasury bonds These trades are settled through GSCC - the Government Securities Clearing Corporation. Treasury BillB. B. I and IV . d. 96, A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date? II. B. A TAC is a variant of a PAC that has a higher degree of prepayment risk Which statements are TRUE regarding CMOs? Mortgage backed pass-through certificates are paid off in a shorter time frame than the full life of the underlying mortgages. 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. All of the following statements are true about PAC tranches EXCEPT: A. Human resource testing. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), which statements are TRUE? There is no such thing as an AAA+ rating; AAA is the highest rating available. Ginnie Mae is backed by the guarantee of the U.S. Government, making it the highest credit rated agency security. 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. They are auctioned off weekly by the Federal Reserve acting as agent for the U.S. Treasury. II. Targeted amortization class The price movements of IOs are counterintuitive! III. $2.50 per $1,000D. Which of the following statements are TRUE regarding GNMA "Pass Through" Certificates? Thus, when interest rates fall, prepayment risk is increased. Because these T-Notes are trading at a premium, the yield to maturity will be lower than the current yield. I, II, III, IV. All of the following trade "and interest" EXCEPT: Of the choices offered, which security is least subject to purchasing power risk? B. federal funds rate A. the certificates are quoted on a percentage of par basis in 32nds C. U.S. Government bond CMOs are packaged and issued by broker-dealers. 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. The bonds with the highest credit risk are Industrial revenue bonds and Equipment trust certificates. American depositary receiptC. If interest rates fall, then the expected maturity will shorten D. Zero Tranche. I. Sallie Mae is wholly owned by the U.S. Government Freddie Mac debt issues are directly guaranteed by the U.S. Government B. 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. There are approximately 20 such firms. A customer who wishes to buy will pay the "Ask" of 4.90. marketability risk \end{array} 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. The Federal Reserve would permit which of the following to be "primary" U.S. Government securities dealers? They tend not to prepay mortgages when interest rates rise, since there is no benefit to a refinancing. Ginnie Mae stock is traded on the New York Stock Exchange Payment is to be made in: Which is considered to be a direct obligation of the US government? If prepayments increase, they are made to the Companion class first. This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates. Regulations: Securities Exchange Act of 1934, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Daniel F Viele, David H Marshall, Wayne W McManus, Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman. taxable in that year as interest income receivedC. CMOs have the highest investment grade credit ratingsD. III. IV. C. Municipal bonds However, T-Receipts still trade until they all mature. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A. c. eliminate prepayment risk to holders of that tranche These are issued at a discount to face and each interest payment made brings the "notional principal" of the bond closer to par. $.625 per $1,000 The Companion, which absorbs these risks first, has the least certain repayment date. T-Notes are sold by negotiated offering Bond classes can be categorised as senior tranches or subordinated (junior) tranches. Plain VanillaC. I, II, IIID. A. term structures Which statement is TRUE about floating rate tranches? abbreviation for Collateralized Debt Obligation, this is a structured product that invests in CMO tranches and was used to create tranches based on underlying sub-prime mortgages. $4,914.06 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. The best answer is C. A PO is a Principal Only tranche. Federal, State and Local income tax. D. Companion. II. II. Because interest will now be paid for a longer than expected period, the price rises. \textbf{Selected Balance Sheet Items}\\ They are sold in $100 minimums at a discount to par value, just like Treasury Bills. II. Interest payments are still made pro-rata to all tranches, but principal repayments made earlier than that required to retire the PAC at its maturity are applied to the Companion class; while principal repayments made later than expected are applied to the PAC maturity before payments are made to the Companion class. IV. can be backed by sub-prime mortgages Commercial banks Thus, average life of the TAC is extended until the arrears is paid. The principal portion of a fixed rate mortgage makes smaller payments in the early years, and larger payments in the later years. A. each tranche has a different maturity I. Each tranche has a different yield This is extension risk - the risk that the CMO tranche will have a longer than expected life, during which a lower than market rate of return is earned. All of the following statements are true regarding collateralized mortgage obligations EXCEPT: A. CMOs are issued by local government agenciesB. If interest rates fall, then the expected maturity will lengthen A PO is a Principal Only tranche. The CMO is backed by mortgage backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac Plain vanilla If interest rates fall, then the expected maturity will shorten. Treasury Bonds are quoted at a discount to par value Which CMO tranche will be offered at the lowest yield? When interest rates rise, the price of the tranche falls Reinvestment risk is greater for Ginnie Maes than for U.S. The current yield of the Treasury Bond is: Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. \text{Retained earnings}&\$175,400&\$220,000&\\ 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. I. Fannie Mae is a publicly traded company 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? Treasury Bonds b. the yield to maturity will be higher than the current yield Treasury Bonds have minimum maturity of more than 10 years, Treasury Bonds are traded in 32nds in varying dollar amounts every month Besides, these portions of bonds or mortgages have varying amounts of risk and maturity. TIPS I Interest is paid before all other tranchesII Interest is paid after all other tranchesIII Principal is paid before all other tranchesIV Principal is paid after all other tranches. What is NOT a risk of investing in a GNMA? Conversely, when market interest rates fall, the rate of prepayments rises (prepayment risk) and the maturity shortens. This is a tranche that only receives the interest payments from an underlying mortgage, and it is created with a corresponding PO (Principal Only) tranche that only receives the principal payments from that mortgage. The PAC class has a lower level of prepayment risk than the Companion class 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. II. C. Industrial Revenue Bond Both securities pay interest at maturity CMOs are subject to a lower level of prepayment risk than the underlying pass-through certificates In periods of inflation, the amount of each interest payment will increase If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected.
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