\begin{array}{c} All of the following statements are true regarding this trade of T-Notes EXCEPT: Which statement is FALSE when comparing Agency CMOs to Private Label CMOs? IV. A. term structures D. Targeted Amortization Class, Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? B. On the other hand, extension risk is decreased. When interest rates rise, the price of the tranche rises Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. FNMA pass through certificates are not guaranteed by the U.S. Government, FNMA is a publicly traded corporation IV. A. 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. Which of the following securities has the lowest level of credit risk? "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). This is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future. All pass through certificates pass on the monthly mortgage payments received from the pooled mortgages to the certificate holders. b. companion tranche A Which statements are TRUE about PO tranches? c. the interest coupons are sold off separately from the principal portion of the obligation C. real interest rate 2 mortgage backed pass through certificates at par Which of the following statements are TRUE about CMOs? III. If interest rates rise, then the expected maturity will shorten Sallie MaesB. 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 \text{Available-for-sale investments, at cost}&\$90,000&\$86,000&\$102,000\\ Principal is paid after all other tranches, Interest is paid after all other 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. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. The best answer is B. 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: $.025 per $1,000B. individuals seeking current income, Which of the following are issued with a fixed coupon rate? Thereby when interest rates increase, prices increase, and vice versa. Primary dealers are expected to bid in weekly Treasury auctions, and must make a secondary market in all U.S. Government issues. D. Guaranteed by the U.S. Government, Which of the following statements are TRUE about the Government National Mortgage Association (GNMA)? 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. The Companion class is given a more certain maturity date than the PAC class CDO tranches are: Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. Question: Which statement is true about FTP? The pure interest rate is one that is free of any investment risks - it is the pure cost of borrowing without any risk premium added to the interest rate. Sallie Mae stock is listed and trades II. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. U.S. Government Bonds These are funds payable at a registered clearing house, which are usually not good funds for three business days. III. A. A. equity security This prepayment speed assumption is used to guesstimate the expected life of a mortgage backed pass-through certificate. 2 mortgage backed pass through certificates at par I. B. When interest rates rise, the price of the tranche fallsB. Prepayment rate Regular way trades of U.S. Government bonds settle: III and IV onlyC. III. Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. Money market instrumentB. B. 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)? I. Thus, the PAC class is given a more certain maturity date and hence lower prepayment risk; while the Companion classes have a higher level of prepayment risk if interest rates drop; and they have a higher level of so-called extension risk - the risk that the maturity may be longer than expected, if interest rates rise. CMO issues have the same market risk as regular pass-through certificates. a. T-bills are traded at a discount from par I. pension funds **d.** Nebraska Press Association v. Stuart, $1976$ b. T-bills are the most actively traded money market instrument III. Reinvestment risk is greater for Ginnie Maes than for U.S. Plain VanillaC. CMOs divide the cash flows into tranches of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. The minimum denomination on Treasury Notes and Bonds is also $100 maturity amount. C. Freddie Mac is a corporation that is publicly traded B. The note pays interest on Jan 1 and Jul 1. 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. c. treasury bonds Why? These are issued at a discount to face and each interest payment made brings the "notional principal" of the bond closer to par. Besides, these portions of bonds or mortgages have varying amounts of risk and maturity. II. C. Municipal bonds 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. I when interest rates fallII when interest rates riseIII so they can refinance at lower ratesIV so they can refinance at higher rates. Thus, the PAC is given a more certain repayment date; while the CMO is given the least certain repayment date. A. C. the trade will settle in Fed Funds When interest rates rise, the interest rate on the tranche rises. The CMO is rated AAA 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). A newer version of a CMO has a more sophisticated scheme for allocating cash flows. principal amount is adjusted to $1,050 Income from REITs is fully taxable as well. Mortgage backed pass-through certificateC. a. CMOs are available in $1,000 denominations C. $162.50 Real Estate Investment TrustD. I. coupon rate is adjusted to 9% 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. CMOs are backed by agency pass-through securities held in trustC. A. a dollar price quoted to a 4.90 basis Which statements are TRUE regarding collateralized mortgage obligations? These trades are settled through GSCC - the Government Securities Clearing Corporation. \textbf{Selected Income Statement Items}\\ Treasury bill b. increase prepayment risk to holders of that tranche 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). 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 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. II. B. A. Ginnie MaesD. C. option The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. They have a much higher minimum to discourage small investors (who tend to be less sophisticated) from buying them - because they have difficult to quantify risks of shortening or lengthening maturities, due to interest rates falling or rising, respectively. I. The U.S. Treasury issues 4 week, 13 week, 26 week, and 52 week T-Bills at a discount from par. II. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A. a. not taxable How much will the customer receive at each interest payment? There is no such thing as an AAA+ rating; AAA is the highest rating available. If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs \quad\quad\quad\textbf{Stockholders' Equity}\\ Conversely, if the principal amount of a Treasury Inflation Protection Security is adjusted downwards due to deflation, the adjustment is tax deductible in that year against ordinary interest income. 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). the U.S. Treasury issues 26 week T- BillsD. D. the credit rating is considered the highest of any agency security. If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. Planned Amortization Class Interest is paid semi-annually II. Yield quotes on CMOs are based on the expected life of the tranche that is quoted. The PAC tranche is a "Planned Amortization Class." When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. $81.25 The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. $$ II and III onlyC. \text{Available-for-sale investments, at fair value}&&&\\ This interest income is subject to both federal income tax and state and local tax. Securities and Exchange Commission PAC tranche holders have lower prepayment risk than companion tranche holdersD. III. Treasury STRIPD. 1.4% When the bills mature, the difference between the purchase price and the redemption value at par is taxable as interest income. actual maturity of the underlying mortgages. A. If the corporate lessee were to default; and then declare bankruptcy, the IRB holders would be left with worthless paper. The note pays interest on Jan 1st and Jul 1st. An annual upward adjustment due to inflation is taxable in that year; an annual downward adjustment due to deflation is not tax deductible in that year.B. 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? A TAC bond is designed to pay a target amount of principal each month. If Treasury bill yields are dropping at auction, this indicates that: II. 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. U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. C. FNMA Pass Through Certificates A customer buys 5M of 3 1/4% Treasury Bonds at 99-31. 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. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A. interest accrues on an actual day month; actual day year basis B. C. Treasury STRIP B. step up step down bond All of the following statements are true about PAC tranches EXCEPT: A. $.625 per $1,000 Do not confuse this with the average life of the mortgages in the pool that backs the CMO. CMOs are often quoted on a yield spread basis to similar maturity: Interest received from all of the following securities is exempt from state and local taxes EXCEPT: Which statements are TRUE regarding Treasury STRIPS? When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. Treasury bondB. ), Fannie Mae (Federal National Mortgage Assn. Thus, the earlier tranches are retired first. III. CMOs are not issued by government agencies; the agency issues the underlying pass-through certificates. Both securities pay interest at maturity 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.

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