Domestic broker-dealers T-Bills trade at a discount from par 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. default risk, A 5 year, 3 1/4% treasury note is quoted at 101-4 - 101-8. d. the securities are purchased at par, All of the following are true statements regarding both treasury bills and treasury receipts EXCEPT: CMOs are packaged and issued by broker-dealers. Sallie MaesB. CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations A. CMO issues have the same market risk as regular pass-through certificates. Thus, CMOs give holders a form of call protection not available in regular pass-through certificates. Which statement is FALSE regarding Treasury Inflation Protection securities? 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. When interest rates rise, the price of the tranche risesB. loan to value ratio. III. can be backed by sub-prime mortgages Principal repayments made earlier than expected are applied to the PAC prior to being applied to the Companion tranche IV. Targeted Amortization ClassC. IV. II. C. $4,900 ** New York Times v. Sullivan, $1964$ \hline All of the following statements are true regarding this trade of T-notes EXCEPT: Hence the true statements are: A. treasury bonds This avoids having to pay tax each year on the upwards principal adjustment.). Certificates are issued in minimum $25,000 denominations. Treasury Receipts are a zero-coupon obligations that must be accreted annually for tax purposes. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security. I, II, IIIC. CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations. Accrued interest on the certificates is computed on an actual day month / actual day year basis B. A. U.S. Government Agency Securities are quoted in 1/32nds purchasing power risk Not too shabby. $.0625 per $1,000 2 mortgage backed pass through certificates at par All of them I. the trading market is very active, with narrow spreads Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. What is not eliminated, however, is credit risk. Thus, the certificate was priced as a 12 year maturity. 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. \text { Gain (loss) from sale of investments } & \$ 7,500 & \$(12,000) \\ During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. III. 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. C. $.625 per $1,000 The note pays interest on Jan 1st and Jul 1st. 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. Which CMO tranche will be offered at the lowest yield? $100B. Since 1 Basis Point = .01% = $.10, 140 Basis Points = 1.40% = $14.00. D. Targeted Amortization Class, Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? chelcee grimes wedding pictures; This is true because when the certificate was purchased, assume that the average life of the underlying 15 year pool (for example) was 12 years. Bond classes can be categorised as senior tranches or subordinated (junior) tranches. C. eliminate prepayment risk to holders of that tranche IV. \textbf{Selected Income Statement Items}\\ 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. Interest received from all of the following securities is exempt from state and local taxes EXCEPT: A. Fannie Mae Pass Through CertificatesB. ** New York Times v. United States, $1974$ They are the shortest-term U.S. government security, often with maturities as short as 5 days. Fannie Mae debt securities are negotiable, When comparing the debt issues of Ginnie Mae to Fannie Mae, which statements are TRUE? mutual fund. Treasury bill The CMO is backed by mortgage backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac "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. series structures principal amount is adjusted to $1,050 Minimum $100 denominations All of the following investments give a rate of return that cannot be affected by "reinvestment risk" EXCEPT: If interest rates fall, then the expected maturity will shorten Thereby when interest rates increase, prices increase, and vice versa. IV. I. pension funds 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. B. lower prepayment risk When the bond matures, the holder receives the higher principal amount. the U.S. Treasury issues 13 week T- BillsC. D. actual maturity of the underlying mortgages. (TIPS are usually purchased in tax qualified retirement plans that are tax-deferred. I. 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. Foreign broker-dealers Homeowners will prepay mortgages when interest rates fall, so they can refinance at more attractive lower current rates. I, II, IIID. a. CMBs III. I Each tranche has a different level of market riskII Each tranche has the same level of market riskIII Each tranche has a different yieldIV Each tranche has the same yield. $81.25 A. GNMA securities are guaranteed by the U.S. Government Which statements are TRUE regarding Z-tranches? If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. Thus, PACs have lower prepayment risk than plain vanilla CMO tranches. The interest earned from which of the following is exempt from state and local tax? For the exam, these securities are still rated AAA. Their focus is on obtaining deposits that are then used to make mortgages to homeowners. D. Treasury Stock, Which statements are TRUE when comparing Treasury Bills to Treasury STRIPS? Targeted amortization classC. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. A. Which statements are TRUE regarding collateralized mortgage obligations? PAC tranches increase prepayment risk to holders of that tranche Principal is paid after all other tranches, A floating rate CMO tranche is MOST similar to a: D. the same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class, the same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class, Which statements are TRUE regarding Z-tranches? Home . which statements are true about po tranches. An IO is an Interest Only tranche. I. Agency CMOs are created by Ginnie Mae, Fannie Mae, or Freddie Mac, using their own mortgage backed securities (MBSs) as the underlying collateral. Thus, the certificate was priced as a 12 year maturity. I. Which of the following statements are TRUE regarding CMOs? represent a payment of both interest and principal Each tranche has a different level of market risk Credit Rating. We are not the heroes of the narrative. B. a dollar price quoted to a 5.00 basis The securities mature at par, Which of the following are TRUE statements regarding both Treasury Bills and Treasury Receipts? STRIPS If interest rates rise, then the expected maturity will lengthen 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. Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). 14% \textbf{Selected Balance Sheet Items}\\ **e.** Collin v. Smitb, $1978$. Fannie Maes. If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranchesB. 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. $$ I, II, IIID. 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. A. lower prepayment risk, but the same extension risk as a Planned Amortization Class D. no prepayment risk. TACs are like a one-sided PAC - they protect against prepayment risk, but not against extension risk. When interest rates rise, prepayment rates rise CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations, "PSA" stands for: actual maturity of the underlying mortgages. 1. individual wishing to avoid reinvestment risk, money market funds rated based on the credit quality of the underlying mortgages A. the pooling of mortgages of similar maturities to back the security Interest is paid after all other tranches II. Which CMO tranche has the least certain repayment date? 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. B. CMBs are sold at a discount to par d. 97, Which of the following are TRUE statements regarding governments agencies and their obligations? II. The bonds are issued at a discount III. C. Planned amortization class II. C. U.S. Government Agency Securities trade flat Newer CMOs divide the tranches into PAC tranches and Companion tranches. The interest received from a Collateralized Mortgage Obligation is subject to: A. IV. when interest rates fall, prepayment rates rise, CMO "planned amortized classes" (PAC tranches): II. Because they trade, the liquidity risk aspect of structured products is eliminated. C. In periods of inflation, the principal amount received at maturity will be par The smallest denomination available for Treasury Bills is: A. I. are made monthly III. Thus, when interest rates fall, prepayment risk is increased. When interest rates rise, the interest rate on the tranche fallsD. 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? Faro particip en la Semana de la Innovacin 24 julio, 2019. When comparing the effect of changing interest rates on prices of a CMO issues versus the prices of regular bond issues, which of the following statements are TRUE? B. I, II, III, IV. Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. Targeted amortization class 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. c. certificates are issued in minimum units of $25,000 GNMA Pass-Through Certificates. A. Which of the following statements are TRUE about Treasury Receipts? The spread between the bid and ask is 2/32nds. If interest rates rise, then the expected maturity will shorten Because these T-Notes are trading at a premium, the yield to maturity will be lower than the current yield. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster, Which statements are TRUE about changes in market interest rates and collateralized mortgage obligations? Thus, PACs have lower extension risk than plain vanilla CMO 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. Agency CMOs are backed by underlying mortgage backed pass-through certificates issued by that agency, while Private Label CMOs are backed only by mortgage backed securities issued by private lenders IV. a. treasury bills Treasury STRIPS are suitable investments for individuals seeking current income If interest rates drop, the market value of the CMO tranches will increase. Because the MBSs are AAA rated, the CMOs created from them are AAA rated as well. 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). The U.S. Treasury issues 4 week, 13 week, 26 week, and 52 week T-Bills at a discount from par. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. T-bills are callable at any time This makes CMOs more accessible to small investors. B. U.S. Government Agency Securities have an implicit backing by the U.S. Government \quad\quad\quad\textbf{Assets}\\ 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. Principal is paid after all other tranches, Interest is paid after all other tranches B. T-bills are issued at a discount, Which statements are TRUE regarding treasury STRIPS? I CMOs make payments to holders monthlyII CMOs receive the same credit rating as the underlying pass-through securities held in trustIII CMOs are subject to a lower level of prepayment risk than the underlying pass-through certificatesIV CMOs are available in $1,000 denominations, A. II, III, IVB. Principal is paid before all other tranches Commercial banks Mortgage backed pass-through certificateC. It acts like a long-term zero coupon bond. Corporate and municipal bond trades settle in clearing house funds. represent a payment of both interest and principal D. $325.00. Interest is paid semi-annually II. When interest rates rise, the price of the tranche risesC. A TAC bond is designed to pay a target amount of principal each month. No certificates are issued for book entry securities; the only ownership record is the "book" of owners kept by the transfer agent. If prepayment rates rise, the PAC tranche will receive its sinking fund payment after its companion tranchesC. A Treasury Bond is quoted at 95-24. D. $4,945.00. CMO issues are more accessible to individual investors than regular pass-through certificatesD. An IO is an Interest Only tranche. Government agency securities have an indirect backing (or implicit) by the U.S. Government. a. prepayment speed assumption 95 c. predicted standardization amortization Because a PAC is relieved of both of these risks, it has the lowest risk and trades at the lowest yield. Government agency securities are quoted in 32nds, similar to U.S. Government securities. Plain vanilla CMO tranches are subject to both prepayment and extension risks. I when interest rates fallII when interest rates riseIII so they can refinance at lower ratesIV so they can refinance at higher rates. If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. When interest rates rise, the price of the tranche rises b. treasury bills A. c. treasury bonds The PAC class has a lower level of prepayment risk than the Companion class, Which statement is TRUE about a Targeted Amortization Class (TAC)? Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. D. loan to value ratio. B. The best answer is B. C. mortgage backed securities issued by a "privatized" government agency \quad\quad\quad\textbf{Stockholders' Equity}\\ $10,000D. \end{array} Both securities pay interest at maturity, The physical securities which are the underlying collateral for Treasury Receipts are: An exception is the interest income received from mortgage backed pass through certificates (issued by GNMA, FNMA, FHLMC). 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. 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. This is true because when the certificate was purchased, assume that the average life of the underlying 15 year pool (for example) was 12 years. 1.4% 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. Therefore, both PACs and TACs provide call protection against prepayments during period of falling interest rates. The process of separating the principal and interest on a debt obligation is known as stripping. fallC. Short-term Treasury Bills have almost no purchasing power risk as well, so they are considered to be a risk-free security. d. the credit rating is considered the highest of any agency security, interest payments are exempt from state and local taxes, Which of the following are TRUE regarding collateralized mortgage obligations? 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. B. quarterly \hline \text { Operating income } & \text { } & \text { } \\ Note that this is different than the typical minimum $1,000 par amount for other debt issues. Prepayment speed assumption Ginnie Mae obligations trade at higher yields than Fannie Mae obligations III. 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. b. planned securitization alogorithm It is primarily associated as a tranche of a collateralized mortgage obligation (CMO), which also. If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs 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). B. Treasury "STRIPS" and Treasury Receipts are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. \text{Valuation allowance for available-for-sale investments}&12,000&(11,000)&h.\\ One of the question asked in certification Exam is, Which statement is true about personas? Accrued interest on the certificates is computed on a 30 day month / 360 day year basis, The certificates are quoted on a percentage of par basis Newer CMOs divide the tranches into PAC tranches and Companion tranches. A PO is a Principal Only tranche. IV. Zero Tranche. The certificates are quoted on a percentage of par basis B. U.S. Government Agency bonds T-bills are issued at a discount, T-bills are registered in the owner's name in book entry form Equipment Trust Certificate I have underlying mortgage collateral that is backed by Fannie Mae, Freddie Mac or Ginne MaeII have underlying mortgage collateral that is backed only by the credit quality of those mortgagesIII are all rated AAAIV are rated based on the credit quality of the underlying mortgages. 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. Tranches are groups of securities of a firm in which investors invest. 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. If Treasury bill yields are dropping at auction, this indicates that: This interest income is subject to both federal income tax and state and local tax. CMOs are backed by agency pass-through securities held in trustC. Treasury Bills C. certificates trade "and interest" A. Which statements are TRUE about IO tranches? GNMA securities are guaranteed by the U.S. Government. $.625 per $1,000 taxable in that year as long term capital gainsD. II. He wants to receive payments over a minimum 10-year investment time horizon. which statements are true about po tranches. What do you think is the most difficult on the same day as trade date Which of the following statements are TRUE about computerized trading of securities on exchanges? a. reduce prepayment risk to holders of that tranche PAC tranches reduce prepayment risk to holders of that tranche It's often empty, meaningless hype driven by consultants and schools and the cottage industry of courses, books, and certificate programs. These are issued at a discount to face and each interest payment made brings the notional principal of the bond closer to par. Prepayment rate FHLB, A collateralized mortgage obligation is best defined as a(n): The spread is: A. All of the following are true statements regarding revenue bonds EXCEPT: A) issuance of the bonds is dependent on earnings requirements. A. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. Principal only strips (PO strips) are a fixed-income security where the holder receives the non-interest portion of the monthly payments on the underlying loan pool. Targeted Amortization Class. 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? 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. II. a. weekly reduce prepayment risk to holders of that tranche We are not the CEOs. A. Treasury Bond FNMA pass through certificates are guaranteed by the U.S. Government Arrange the following CMO tranches from lowest to highest yield: II rated based on the credit quality of the underlying mortgages. Macaulay durationD. Each tranche has a different level of credit risk The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. Regarding the Student Loan Marketing Association (Sallie Mae) which of the following statements are TRUE? Newer CMOs divide the tranches into PAC tranches and Companion tranches. Federal Reserve C. discount bond b. companion tranche Older CMOs are known as "plain vanilla" CMOs, because the repayment scheme is 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. which statements are true about po tranchesdead island crossplay xbox pcdead island crossplay xbox pc B. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. Treasury Bills, The nominal interest rate on a TIPS approximates the: $4,914.06 Highland Industries Inc. makes investments in available-for-sale securities. III. I. Ginnie Mae is a publicly traded company Selected income statement items for the years ended December 31, 2014 and 2015, plus selected items from comparative balance sheets, are as follows: A. PAC tranche Regular way trades of U.S. Government bonds settle: The service limit is a quota set on a resource. purchasing power risk Companion ClassD. 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 spread between the bid and ask is 8/32nds. D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. Fannie Mae debt securities are negotiable Browse over 1 million classes created by top students, professors, publishers, and experts. Interest is paid semi-annually B. 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. III. For example, 30 year mortgages are now typically paid off in 10 years - because people move. receives payments on a pro-rata basis with other tranchesD. CMO issues are rated AAAC. D. $6.25 per $1,000. a. GNMA is empowered to borrow from the treasury to pay interest and some principal if necessary Finally, each American Depositary Receipt represents a fixed number of foreign shares held in trust. D. call risk. When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A. 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: A TAC is a variant of a PAC that has a higher degree of prepayment risk taxable in that year as interest income receivedC. These represent a payment of both interest and principal on the underlying mortgages. D. Companion. 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. Fully depreciated equipment costing $50,000 is discarded. treasury notes 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?