An annual upward adjustment due to inflation is taxable in that year; an annual downward adjustment due to deflation is tax deductible in that year.C. . taxable in that year as interest income receivedC. Prepayment risk b. risk of early prepayment of mortgages if interest rates fall 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. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. A. zero coupon bond III. Macaulay durationD. Which of the following statements are true? A government securities dealer quotes a 3 month Treasury Bill at 5.00 Bid - 4.90 Ask. Compute the derivative of the given function and find the slope of the line that is tangent to its graph for the specified value of the independent variable. 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 of the following is an original issue discount obligation? If Treasury bill yields are dropping at auction, this indicates that: Equipment Trust Certificate Treasury Bills are quoted on a yield basis. 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. All of the following trade "and interest" EXCEPT: Which of the following are TRUE statements regarding treasury bills? 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. The spread is: When interest rates rise, the interest rate on the tranche risesD. 2 mortgage backed pass through certificates at par 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. The CMO is backed by mortgage backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac III. III. A. I. Ginnie Mae is a publicly traded company B. Freddie Mac is an issuer of mortgage backed pass-through certificates D. according to the amortization schedule of the underlying mortgages. b. T-bills are the most actively traded money market instrument B. increase prepayment risk to holders of that tranche I, II, IIID. Which of the following trade "flat" ? Note, however, that the PSA can change over time. I. b. monthly STRIPS Plain Vanilla TrancheD. c. risks of default if homeowners do not make their mortgage payments All of the following statements are true regarding money market funds EXCEPT: A. typical maturities of securities held in the portfolio are 30 days or less B. fund dividends are not taxable if reinvested in additional shares money market funds are typically sold without a sales charge money market funds impose management fees. T-Bills trade at a discount from par CMO tranches are generally AAA rated (or have an implied AAA rating because the tranches are backed by GNMA, FNMA or Freddie Mac pass-through certificates). I, II, III, IV. $$ \begin{array}{lccc} IV. CMO holders receive monthly payments derived from the underlying mortgage backed pass-through certificates. 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. Treasury Bills 13 weeks All government and agency securities are quoted in 32nds Treasury bill prices are rising, interest rates are falling 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. 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. C. series structures money market funds 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. Interest is paid semi-annually II. Which statement is TRUE about PO tranches? I. T-Bills trade at a discount from par A mortgage backed security that is backed by an underlying pool of 30 year mortgages has an expected life of 10 years. I. treasury bills True, the transition to the post-growth era won't be easy for the CCP or the Chinese people if income and wages level off or worsen, and if a declining tax base can't sustain an aging population. IV. IV. Targeted Amortization ClassC. Planned Amortization Class I, II, IIID. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. When interest rates rise, the price of the tranche risesC. 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" Which of the following statements regarding collateralized mortgage obligations are TRUE? There were no dividends. Which statement is FALSE regarding Treasury Inflation Protection securities? Which of the following statements are TRUE about Treasury Receipts? II. IV. Collateralized mortgage obligations may be backed by all of the following securities EXCEPT: The longer the maturity, the greater the price volatility of a negotiable debt instrument. Losses are first absorbed by the most junior (lower) classes. When interest rates fall, homeowners do refinance their mortgages, and the prepayment rate will be higher than expected. D. $325.00. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. III. Which statements are TRUE about CMO Targeted Amortization Class (TAC) tranches? A customer who wishes to buy 1 Treasury Bill will pay: The best answer is A. III. I. The certificates are quoted on a percentage of par basis This is the discount earned over the life of the instrument. Arrange the following CMO tranches from lowest to highest yield: II rated based on the credit quality of the underlying mortgages. CMOs receive the same credit rating as the underlying pass-through securities held in trust If the maturity shortens, then for a given fall in interest rates, the price will rise slower. II. B. I. In periods of inflation, the coupon rate remains unchanged Once the Treasury started issuing STRIPS in 1986, there was no need for the middleman anymore. Extended maturity risk I. Plain vanillaB. We are not the heroes of the narrative. The service limit is set by Oracle based on the pricing model. A. a. GNMA is empowered to borrow from the treasury to pay interest and some principal if necessary CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations, "PSA" stands for: Local income tax onlyD. C. In periods of deflation, the principal amount received at maturity will decline below par &\textbf{Dec.31, 2013}&\textbf{Dec.31, 2014}&\textbf{Dec.31, 2015}\\\hline can be backed by sub-prime mortgages III. B. FHLB, A collateralized mortgage obligation is best defined as a(n): Ginnie Mae securities are listed and trade, Interest payments on Ginnie Mae pass-through certificates are made: When interest rates rise, the price of the tranche fallsB. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. 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. Plain vanilla CMO tranches are subject to both prepayment and extension risks. Which statements are TRUE about PO tranches? Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. 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. Certificates are issued in minimum $25,000 denominations. A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. 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. \end{array} C. Plain Vanilla Tranche chelcee grimes wedding pictures; When interest rates rise, the interest rate on the tranche rises. $10,000D. B. in constant dollar amounts every month 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. which statements are true about po tranches February 11, 2022 by 2) After slice and dice into many tranches, in order to sell them, each tranch (product) is manipulated to let it price more than it is actually worth, thus further squeezing additional profits. 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. \end{array} A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. Unlike U.S. III. C. When interest rates rise, the interest rate on the tranche falls This "prepayment speed assumption" is used to "guesstimate" the expected life of a mortgage backed pass-through certificate. I, II, III, IV. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. A. GNMA is empowered to borrow from the Treasury to pay interest and principal if necessary b. treasury bills The annual accretion amount is taxable, since the underlying securities are U.S. Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like "wild cards" - whatever is left over is what you get! A. I. 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. 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. Planned Amortization ClassB. I. GNMA is a publicly traded corporation Government bond trades settle next business day; accrued interest is computed on an actual month/actual year basis; and trades settle through the Federal Reserve system in "Fed Funds. 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. They do have purchasing power risk (the risk of inflation eroding real returns), but this is only an issue for long-term maturities. If the inflation rate during the first year of the security's life is 5%, the: Ginnie Mae is a U.S. Government Agency Interest income is accreted and taxed annually, US Treasury securities are considered subject to which of the following risks? I. $2.50 per $1,000D. CMO Targeted Amortization Classes (TACs) have: d. taxable at maturity, taxable in that year as interest income received, Which CMO tranche is least susceptible to interest rate risk? Thus, the prepayment rate for CMO holders will increase. which statements are true about po tranches. Each tranche of a CMO, in effect, represents a differing expected maturity, hence each tranche has a different level of market risk. The other agencies are only implicitly backed. Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government 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. D. Treasury Receipts. All of the following statements are true about CMOs EXCEPT: A. CMO issues have a serial structureB. individual wishing to avoid reinvestment risk, money market funds A. Fannie Mae CertificateB. CMO investors are subject to which of the following risks? 1. B. lower prepayment risk Treasury NotesC. A. IV.