which statements are true about po tranches

8 Q I. Which statements are TRUE about PO tranches? Newer CMOs divide the tranches into PAC tranches and Companion tranches. I. CMOs are backed by agency pass through securities held in trust Companion. Debt: U.S. Government Debt Flashcards | Quizlet which statements are true about po tranches - Qocitsupport.com The note pays interest on Jan 1st and Jul 1st. I. Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government \textbf{Highland Industries Inc.}\\ IV. Agency obligations have the direct backing of the US government U.S. Government debt is sold via competitive bidding at a weekly auction conducted by the Federal Reserve. III. Thus, the certificate was priced as a 12 year maturity. when interest rates fall, prepayment rates rise, CMO "planned amortized classes" (PAC tranches): coupon rate remains at 4% Commercial banks II. a. interest is paid at maturity 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: B. c. CMB Which statement is TRUE about floating rate tranches? After reviewing the website, explain how not-for-profit organizations are rated. Home . when interest rates rise, prepayment rates fall T-bills are issued at a discount, T-bills are registered in the owner's name in book entry form Treasury Bond Yield quotes for collateralized mortgage obligations are based upon: 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 By . 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. 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. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. Thus, the earlier tranches are retired first. 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. 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. The segmented class of assets determines the amount that traders will receive when their bonds reach maturity. when interest rates fall, prepayment rates rise If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. Both securities are issued by the U.S. Government \textbf{For the Year Ended December 31, 2014 and 2015}\\ C. Companion Class A. The last 3 statements are true. A. standard deviation of returns Thus, the prepayment rate for CMO holders will increase. \text{Valuation allowance for available-for-sale investments}&12,000&(11,000)&h.\\ There are no new T-Receipt issues coming to market. III. \text { Net income (loss) } & \text { } & (21,000) Sallie Mae issues debentures, and uses the funds to make a secondary market, buying student loans from originating lenders (Sallie Mae stands for Student Loan Marketing Association). Which of the following is an original issue discount obligation? CMOs are backed by agency pass-through securities held in trustC. which statements are true about po tranches Plain vanilla CMO tranches are subject to both prepayment and extension risks. Treasury Bills D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis. represent a payment of only interest. There could be more than one bond class (or tranche), and bond classes vary depending on how they will share any losses resulting from borrowers' defaults (or prepayment, which we will see later). Which of the following statements are TRUE about CMOs in a period of rising interest rates? rated based on the credit quality of the underlying mortgages Which statements are TRUE regarding the effect of changing interest rates on the expected maturity of a CMO tranche? c. PAC tranche II. Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? The minimum denomination on a Treasury Bill is $100 maturity amount. CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations. All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT: Which of the following statements are TRUE regarding the settlement of trades in U.S. Government bonds? PACs differ from TACs in that TACs do not offer protection against a decrease in prepayment speedsC. A PO is a Principal Only tranche. **e.** Collin v. Smitb, $1978$. D. FNMA bond. Treasury Bonds have minimum maturity of more than 10 years, Which investment does NOT have purchasing power risk? The Treasury does not issue 1 week T-Bills. D. Any of the above. D. Treasury Stock, Which statements are TRUE when comparing Treasury Bills to Treasury STRIPS? In periods of inflation, the principal amount received at maturity will be par The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. which statements are true about po tranches - Amolemrooz.ir c. When interest rates rise, the interest rate on the tranche rises. Losses are first absorbed by the most junior (lower) classes. 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. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A. Unlike regular bonds, where when interest rates rise, prices fall, with an IO, when interest rates rise, prices rise! 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. A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. CMBs are Cash Management Bills. Principal repayments made later than expected are applied to the PAC prior to being applied to the Companion tranche. \textbf{For the Year Ended December 31, 2013, 2014 and 2015}\\ mutual fund. a. treasury bills which statements are true about po tranches All of the following trade "and interest" EXCEPT: Of the choices offered, which security is least subject to purchasing power risk? When interest rates rise, the interest rate on the tranche rises. The annual accretion amount is subject to Federal income tax each year, as the underlying securities are U.S. A Z-tranch is a zero tranche that receives no payments, either interest or principal, until all other tranches before it are paid off. A Z-tranch is a Zero tranche. The CMO purchaser buys a specific tranche. The loan to value ratio is a mortgage risk measure. 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 A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. I. \quad\quad\quad\textbf{Assets}\\ \text { Gain (loss) from sale of investments } & \$ 7,500 & \$(12,000) \\ Foreign broker-dealers which statements are true about po tranches - Travisag.com C. Municipal bonds cannot be backed by sub-prime mortgages. B. mortgage backed securities created by a bank-issuer If interest rates rise, then the expected maturity of a CMO tranche will lengthen, due to a lower prepayment rate than expected. a. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. When interest rates fall, homeowners do refinance their mortgages, and the prepayment rate will be higher than expected. b. Sallie Mae Commercial banks Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. Midterm 3 Flashcards | Quizlet All of the following statements are true regarding this trade of T-Notes EXCEPT: III. The interest earned from which of the following is exempt from state and local tax? Human resource testing. \begin{array}{lccc} \text{Unrealized gain (loss) on available-for-sale investments}&&&(16,400)\\ III. Annual interest on the bonds is 3.25% of $5,000 face amount equals $162.50. B. purchasing power risk When all of the interest is paid, the notional principal has been brought to par and the security is now paid off. II. American depositary receiptC. I. holders of PAC CMO tranches have lower prepayment risk \end{array} B. Non- deliverable forwards and contracts for differences have distinct settlement procedures. Ginnie Mae issues are not directly backed by the full faith and credit of the U.S. Government part of budgeting? a. CMBs Since 1 Basis Point = .01% = $.10, 140 Basis Points = 1.40% = $14.00. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), which statements are TRUE? D. according to the amortization schedule of the underlying mortgages. Interest received from all of the following securities is exempt from state and local taxes EXCEPT: A. Fannie Mae Pass Through CertificatesB. Which statement is TRUE about PO tranches? B. less than the rate on an equivalent maturity Treasury Bond Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like wild cards - whatever is left over is what you get! I. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. Treasury bond What is the current yield, disregarding commissions? A. each tranche has a different maturity Principal Only Strips (PO Strips) Definition - Investopedia He wants to receive payments over a minimum 10-year investment time horizon. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. CMOs take the payment flow from the underlying pass-through certificates and allocate them to so-called tranches. A CMO backed by 30 year mortgages might be divided into 15-30 separate tranches. Since each tranche represents a differing maturity, the yield on each will differ, as well. D. Series EE Bonds. Which CMO tranche will be offered at the highest yield? Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. A derivative product is one whose value is derived via a formula from an underlying investment. individual wishing to avoid reinvestment risk, money market funds The holder is subject to reinvestment risk CMOs are available in $1,000 denominations. a. reduce prepayment risk to holders of that tranche 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. Duration is a measure of bond price volatility. CMBs are sold at a regular weekly auction CMOs have investment grade credit ratings B. TAC tranche T-Bills have a maximum maturity of 2 years 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). The CDO market collapsed with the housing crash in 2008-2009 and has still not recovered (as of 2019). Which statements are TRUE regarding CMOs? a. The housing bubble that ended badly in 2008 with a market crash was fueled by massive issuance of sub-prime mortgages to unqualified home buyers, that were then packaged into CDOs and sold to unwitting institutional investors who relied on the credit rating assigned by S&P or Moodys. I. T-bills are registered in the owner's name in book entry form A floating rate CMO tranche is MOST similar to a: The best answer is B. A customer buys 5M of 3 1/4% Treasury Bonds at 99-31. Both securities are money market instruments, Both securities are sold at a discount A. GNMA certificate Then it is paid off at par. Series EE bonds have no price volatility since they are non-negotiable. Thus, because the PAC has lowered prepayment and extension risk, its yield will be lower than the surrounding Companion classes. Interest income is accreted and taxed annually, US Treasury securities are considered subject to which of the following risks? II. These are issued at a deep discount to face. All of the following statements are true about CMOs EXCEPT: A. CMO issues have a serial structureB. Interest Only (IO) Strips: Definition and How They Work - Investopedia When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. Thus, PACs have lower prepayment risk than plain vanilla CMO tranches. IV. I. II. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. 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. II. $$ Users should NOT be allowed to delete review records after job application records have been approved. The price movements of IOs are counterintuitive! C. the trade will settle in Fed Funds A. credit risk 24/32nds = .75, so the bond is quoted at 95.75% of $1,000 par value = $957.50. Debt QUIZ #1 Flashcards | Chegg.com Principal repayments on a CMO are made: holders of "plain vanilla" CMO tranches have higher prepayment risk, holders of PAC CMO tranches have lower prepayment risk Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. B. II. IV. Governments. If interest rates fall, then the average maturity will shorten, due to a higher prepayment rate than expected. FHLMC Treasury bill Treasury Bonds are quoted at a discount to par value A. 2 mortgage backed pass through certificates at par Targeted Amortization Class Their focus is on obtaining deposits that are then used to make mortgages to homeowners. The first 3 statements are true. I, II, III, IV. Debt Securities: Government Debt Flashcards | Quizlet ** New York Times v. Sullivan, $1964$ Treasury bondB. Plain vanillaB. marketability risk I. through a National Securities Clearing Corporation taxable in that year as long term capital gainsD. 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 note pays interest on Jan 1 and Jul 1. 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. Principal is paid before all other tranches It gets no payments until all prior tranches are retired. Treasury Bonds c. risks of default if homeowners do not make their mortgage payments Treasury STRIPS are suitable investments for individuals seeking current income I, II, IIIC. TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates. Plain VanillaC. mortgage backed securities created by a bank-issuerC. If interest rates drop, the market value of the CMO tranches will increase ), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. A "derivative" product is one whose value is "derived" via a "formula" from an underlying investment. 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? Interest is paid semi-annually II. The best answer is C. A PO is a Principal Only tranche. When the bond matures, the holder receives the higher principal amount. T-Bills trade at a discount from par 1.4% A. a dollar price quoted to a 4.90 basis Treasury STRIP. Which CMO tranche is LEAST susceptible to interest rate risk? CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. b. treasury notes Market Value As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. Equipment Trust Certificate Which statements are TRUE when comparing Companion CMO tranches to plain vanilla CMO tranches? D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. I. (It is not a leap year). For example, 30 year mortgages are now typically paid off in 10 years - because people move. 8/32nds = 1/4th = .25% of $1,000 par = $2.50. c. 96 Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Financial Management, Concise Edition, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield. When this interest is received by the certificate holder, both the federal and state government want to recapture this interest income and tax it. which statements are true about po tranches - Elso7ba.com Mortgage backed pass-through certificates are paid off in a shorter time frame than the full life of the underlying mortgages. Governments. mortgages on privately owned homes and apartments. B. the yield to maturity will be higher than the current yield 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. Treasury Bonds 14% CDO tranches are: Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds Interest earned is subject to reinvestment risk, The bonds are issued at a discount C. the same level of prepayment risk Companion Tranche Definition - Investopedia Collateralized mortgage obligations are backed by mortgage pass-through certificates that are held in trust. Which statements are TRUE regarding collateralized mortgage obligations? 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. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. Treasury BillB. C. 15 year standard life coupon rate remains at 4% 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 b. floating rate tranche If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. 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. B. in constant dollar amounts every month The holder is not subject to reinvestment risk, Treasury STRIPS are not suitable investments for individuals seeking current income Which of the following statements are TRUE about CMOs? I PACs are similar to TACs in that both provide call protection against increasing prepayment speedsII PACs differ from TACs in that TACs do not offer protection against a decrease in prepayment speedsIII PAC holders have a degree of protection against extension risk that is not provided to TAC holdersIV TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates, A. I onlyB. IV. III. 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. 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. Thus, CMOs give holders a form of call protection not available in regular pass-through certificates. II. which statements are true about po tranches Thus, average life of the TAC is extended until the arrears is paid. I. Ginnie Mae is a publicly traded company As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. IV. Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. 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 CMO tranche has the least certain repayment date? C. certificates are issued in minimum units of $25,000 Federal Farm Credit Funding Corporation BondsD. d. 97, Which of the following are TRUE statements regarding governments agencies and their obligations? 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. Treasury Notes B. Often CMO tranches are quoted on a "yield spread" basis to equivalent maturing U.S. Government Agency issues (makes sense since agency issues are the "collateral" for such securities). prepayment speed assumptionC. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). Which statements are TRUE about IO tranches? If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. D. Freddie Mac debt issues are directly guaranteed by the U.S. Government. which statements are true about po tranches Fannie Maes. Treasury STRIP All of the following statements are true regarding collateralized mortgage obligations EXCEPT: A. CMOs are issued by local government agenciesB. II and IIID. These trades are settled through GSCC - the Government Securities Clearing Corporation. Approximately how much will the customer pay, disregarding commissions and accrued interest? IV. Default risk (It is not a leap year.) I. Sallie Mae is a privatized agency which statements are true about po tranches. 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. D. In periods of deflation, the principal amount received at maturity is unchanged at par, In periods of deflation, the principal amount received at maturity will decline below par, Which of the following statements about Treasury STRIPS are TRUE? If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected.

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