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. d. taxable at maturity, taxable in that year as interest income received, Which CMO tranche is least susceptible to interest rate risk? Let's be real with ourselves. b. D. $4,945.00. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. can be backed by sub-prime mortgages Principal is paid after all other tranches, A floating rate CMO tranche is MOST similar to a: Government agency securities are quoted in 32nds, similar to U.S. Government securities. This prepayment speed assumption is used to guesstimate the expected life of a mortgage backed pass-through certificate. 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. a. interest is paid at maturity When interest rates rise, the price of the tranche rises II. A customer with $50,000 to invest could buy 2 of these certificates at par. Mutual fund shares are not a derivative, because Net Asset Value per share is a direct correlation to the value of total net assets divided by the number of shares outstanding. Treasury securities are the safest investment - they have virtually no credit risk (default risk) and almost no marketability risk. Fannie Mae debt securities are non-negotiable, Fannie Mae is a publicly traded company b. When the bills mature, the difference between the purchase price and the redemption value at par is taxable as interest income. B. step up step down bond If interest rates drop, the market value of CMO tranches will decrease 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. Principal is paid before all other tranches An IO is an Interest Only tranche. Plain vanilla A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. Yield quotes for collateralized mortgage obligations are based upon: If the mortgages backing a Ginnie Mae Pass Through Certificate are prepaid (if interest rates have dropped), the certificate holder receives payments that are a return of principal, and that, when reinvested at lower current rates, produce a lower return (this is reinvestment risk). III. 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. 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. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. Ginnie MaesD. When interest rates rise, prepayment rates rise If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. Treasury Bonds are quoted at a discount to par value Which statements are TRUE regarding Treasury debt instruments? 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" Question: Q5. Treasury Notes If it is an agency CMO created by Ginnie Mae, the securities have the direct backing of the U.S. Government; if the agency CMO is created by Fannie Mae or Freddie Mac, it has the implied backing of the U.S. Government. C. Macaulay duration Thus, the rate of principal repayments varies, depending on market interest rate movements. Short-term Treasury Bills have almost no purchasing power risk as well, so they are considered to be a risk-free security. Post author: Post published: June 23, 2022 Post category: assorted ornament by ashland assorted ornament by ashland Each tranche of a CMO, in effect, represents a differing expected maturity, hence each tranche has a different level of market risk. In periods of deflation, the principal amount received at maturity is unchanged at par, Which statement is FALSE regarding Treasury Inflation Protection securities? Again, these are derived via a formula. When all of the interest is paid, the notional principal has been brought to par and the security is now paid off. b. the yield to maturity will be higher than the current yield The service limit is set by Oracle based on the pricing model. A TAC bond is designed to pay a target amount of principal each month. Thus, payments are received monthly. U.S. Government Agency bonds I. T-bills are registered in the owner's name in book entry form When interest rates rise, the interest rate on the tranche fallsD. Losses are first absorbed by the most junior (lower) classes. Interest earned is subject to reinvestment risk, The bonds are issued at a discount The bonds are issued at a discount III. 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: U.S. Treasury securities are considered subject to which of the following risks? A. A derivative product is one whose value is derived via a formula from an underlying investment. 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. 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. market value Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. A. the pooling of mortgages of similar maturities to back the security Treasury Bills are not subject to reinvestment risk because they are essentially short term "zero-coupon" obligations. Which of the following trade "flat" ? III. Thus, there is no purchasing power risk with these securities. Treasury Bonds have minimum maturity of more than 10 years, Which investment does NOT have purchasing power risk? 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). II. The CMO takes on the credit rating of the underlying collateral. A collateralized mortgage obligation is best defined as a derivative product. Which of the following statements are TRUE about CMOs in a period of rising interest rates? Planned Amortization ClassB. \quad\quad\quad\textbf{Stockholders' Equity}\\ 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. There were no dividends. 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. All of the following are true statements regarding Treasury Bills EXCEPT: A. T-Bills are issued in bearer form in the United States B. T-Bills are registered in the owner's name in book entry form C. T-Bills are issued at a discount D. T-Bills are non-callable. how to build a medieval castle in minecraftEntreDad start a business, stay a dad. Approximately how much will the customer pay, disregarding commissions and accrued interest? The dollar price of a $1,000 par bond is: A $950.24 B $952.40 C $957.50 D $1,000.00. General Obligation Bond I, II, III, IV. They are sold in $100 minimums at a discount to par value, just like Treasury Bills. Federal Farm Credit Funding Corporation BondsD. They are the shortest-term U.S. government security, often with maturities as short as 5 days. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. interest rates are rising IV. IV. $$ a. Fannie Mae In periods of deflation, the amount of each interest payment will decline In periods of inflation, the principal amount received at maturity will be par which statements are true about po tranches. Domestic broker-dealers A. the same as the rate on an equivalent maturity Treasury Bond IV. Today 07:16 Thus, the earlier tranches are retired first. Therefore, as 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 as well. A. PAC tranche A TAC bond is designed to pay a target amount of principal each month. C. mortgage backed securities issued by a "privatized" government agency B. U.S. Government Agency bonds IV. taxable in that year as interest income receivedC. A. reduce prepayment risk to holders of that tranche Of the choices listed, Treasury Bonds have the longest maturity. CMOs have a lower level of market risk (risk of price volatility due to movements in market interest rates) than do mortgage backed pass-through certificates. C. Series EE Bonds mortgage backed securities created by a bank-issuerC. If interest rates rise, then the expected maturity will lengthen All of the following statements are true about PAC tranches EXCEPT: A. Sallie Mae stock is listed and trades A "derivative" product is one whose value is "derived" via a "formula" from an underlying investment. The interest received from a Collateralized Mortgage Obligation is subject to: Which statement is TRUE regarding the tax treatment of the annual adjustment to the principal amount of a Treasury Inflation Protection Security? In periods of deflation, the amount of each interest payment is unchanged Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. Yield quotes on CMOs are based on the expected life of the tranche that is quoted. Treasury bondB. A. After reviewing the website, explain how not-for-profit organizations are rated. Thus, the earlier tranches are retired first. Browse over 1 million classes created by top students, professors, publishers, and experts. Which statements are TRUE about PO tranches? Interest income is accreted and taxed annually IV. III. If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranchesB. I. treasury bills Treasury STRIP. Ginnie Mae obligations trade at higher yields than Fannie Mae obligations T-bills are issued at a discount, Which statements are TRUE regarding treasury STRIPS? Federal Home Loan Bank Bonds. B. each tranche has a different yield Governments. There are approximately 20 such firms. 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. I CMO issues have a serial structureII CMO issues are rated AAAIII CMO issues are more accessible to individual investors than regular pass-through certificatesIV CMO issues have a lower level of market risk than regular pass-through certificates, A. I and II onlyB. D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. b. interest payments are exempt from state and local taxes PAC tranche holders have higher extension risk than companion tranche holders. II. Because interest will now be paid for a longer than expected period, the price rises. C. CMBs are sold at a regular weekly auction Principal repayments made later than expected are applied to the PAC prior to being applied to the Companion tranche How much will the customer receive at each interest payment? D. When interest rates rise, the interest rate on the tranche rises. 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. Which statements are TRUE about PO tranches? Universal Containers has built a recruiting application with 2 custom objects, Job Applications and Reviews, that have a master-detail relationship. Interest is paid after all other tranches Interest rate risk, Extended maturity risk The interest coupons are sold off separately from the principal portion of the obligation how to put bobbin case back together singer; jake gyllenhaal celebrity look alike; carmel united methodist church food pantry hours; new year's rockin' eve 2022 performers IV. II. If interest rates drop, the market value of the CMO tranches will increase A companion tranche is a class, or type, of tranche, which is a portion of a debt or security. Treasury NoteC. 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. Holders of CMOs receive interest payments: The note pays interest on Jan 1 and Jul 1. The customer buys the bonds at 101 and 8/32s = 101.25% of $1,000 = $1,012.50. Thus, the certificate was priced as a 12 year maturity. The best answer is C. A PO is a Principal Only tranche. D. the credit rating is considered the highest of any agency security, the credit rating is considered the highest of any agency security, Which of the following statements are TRUE about the Federal National Mortgage Association (FNMA)? A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. 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. 2 basis points B. B. When interest rates rise, the interest rate on the tranche falls. III. IV. III. 26 weeks These trades are settled through GSCC - the Government Securities Clearing Corporation. If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs For the exam, these securities are still rated AAA. $81.25 $$ B. serial structures \text{Unrealized gain (loss) on available-for-sale investments}&&&(16,400)\\ 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. Which statement is TRUE about floating rate tranches? prepayment speed assumptionC. c. PAC tranche Federal Farm Credit Funding Corporation Note. The note pays interest on Jan 1st and Jul 1st. 2/32nds = .0625% of $1,000 par = $.625. c. risks of default if homeowners do not make their mortgage payments 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 security has, as its return, the pure interest rate? But we've saved 90% of the people and identified most of the alien overlords and their centers. B. security which is backed by the full faith, credit, and taxing power of the U.S. Government \hline 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? D. 50 mortgage backed pass through certificates at par. I. The certificates are quoted on a yield basis Each tranche has a different yield D. In periods of inflation, the principal amount received at maturity is more than par. This interest income is subject to both federal income tax and state and local tax. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. Planned Amortization ClassB. A. c. taxable in that year as long term capital gains The underlying securities are backed by the full faith and credit of the U.S. Government A 5 year $1,000 par 3 1/2% Treasury Note is quoted at 101-4 - 101-8. are volatile. Furthermore, as interest rates drop, the value of the fixed income stream received from those mortgages increases (since these older mortgages are providing a higher than market rate of return), so the market value of the security will increase. 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. the same level of extension riskD. The holder of a specific tranche of a CMO will only receive prepayments after all earlier tranche holders are repaid. The best answer is C. Securities and Exchange Commission During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. individuals seeking current income, Which of the following are issued with a fixed coupon rate? C. real interest rate 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. The collateral backing private CMOs consists of: Thus, the certificate was priced as a 12 year maturity. C. series structures a. interest accrues on an actual day month; actual day year basis What is the current yield, disregarding commissions? b. risk of early prepayment of mortgages if interest rates fall A customer who wishes to buy 1 Treasury Bill will pay: 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. Highland Industries Inc. makes investments in available-for-sale securities. If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. PACs protect against prepayment risk, by shifting this risk to an associated Companion tranche. Primary dealers are expected to bid in weekly Treasury auctions, and must make a secondary market in all U.S. Government issues. \text{Valuation allowance for available-for-sale investments}&12,000&(11,000)&h.\\ U.S. Government debt is sold via competitive bidding at a weekly auction conducted by the Federal Reserve. The U.S. Treasury issues 4 week, 13 week, 26 week, and 52 week T-Bills at a discount from par. Again, these are derived via a formula. d. Freddie Mae, Which of the following would NOT purchase STRIPS? TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates. Conventional Treasury Bonds are subject to this risk, since interest payments are received semi-annually. A. Treasury bill The preparation of the audited annual financial statements of the Group was supervised by Mr M Bosman, CA(SA). These are issued at a deep discount to face. III. Salesforce 401 Dev Certification Questions Answers Part 1. 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? The annual accretion amount is subject to Federal income tax each year, as the underlying securities are U.S. Treasury Bonds Which statement is TRUE about PO tranches? C. more than the rate on an equivalent maturity Treasury Bond C. Industrial Revenue Bond In periods of deflation, the interest rate is unchanged Yield quotes for collateralized mortgage obligations are based upon: A. average life of the trancheB. Also note that even though Standard and Poors downgraded Treasury Debt to an AA+ rating in the summer of 2011, Moodys and Fitchs retained their AAA ratings. I and IVC. A $1,000 par Treasury Note is quoted at 100-1 - 100-9. If interest rates drop, homeowners will refinance their mortgages, increasing prepayment rates on CMOs CMOs are Collateralized Mortgage Obligations. 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. 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. B. Freddie Mac is an issuer of mortgage backed pass-through certificates a. reduce prepayment risk to holders of that tranche reduce prepayment risk to holders of that tranche IV. III. receives payments on a pro-rata basis with other tranchesD. Regarding the Student Loan Marketing Association (Sallie Mae) which of the following statements are TRUE? Newest issues of Treasury Notes are issued in: A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. A. CMBs are used to smooth out cash flow C. the trade will settle in Fed Funds Finally, each American Depositary Receipt represents a fixed number of foreign shares held in trust. A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. Do not confuse this with the average life of the mortgages in the pool that backs the CMO. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. loan to value ratio. III. a. CMOs are available in $1,000 denominations 19-29 Cash Flows for GNMA IO and PO b. CDO A. A. 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. Market Value II. I, II, IVD. I. C. 140% Because the principal is being paid back at a later date, the price falls. A Targeted Amortization Class (TAC) is a variant of a PAC. C. the same level of prepayment risk III. Treasury STRIPD. Treasury STRIPS are quoted in 32nds T-Bills have a maximum maturity of 2 years C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class T-bills are issued at a discount, T-bills are registered in the owner's name in book entry form The smallest denomination available for Treasury Bills is: A. D. Treasury Bond. represent a payment of both interest and principal 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. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. 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. Freddie Mac pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates). Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. In periods of deflation, the principal amount received at maturity will decline below par D. $325.00. It acts like a long-term zero-coupon bond, so it is most susceptible to interest rate risk. D. GNMA Pass Through Certificates. This makes CMOs more accessible to small investors. I. I. coupon rate is adjusted to 9% III. REITs are common stock companies that make direct investments in real estate. The portfolio is assembled by a broker-dealer, who sells receipts representing ownership of the interest. U.S. Government Bonds II. Once the Treasury started issuing STRIPS in 1986, there was no need for the middleman anymore. 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. There are no new T-Receipt issues coming to market. The PAC class has a lower level of prepayment risk than the Companion class Beitrags-Autor: Beitrag verffentlicht: 22. IV. (It is not a leap year.) C. In periods of inflation, the principal amount received at maturity will be par C. certificates trade "and interest" Payment is to be made in: Which is considered to be a direct obligation of the US government? \text{Available-for-sale investments, at fair value}&&&\\ D. actual maturity of the underlying mortgages.