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Interest rate risk, 140 Basis points equal: which statements are true about po tranches. Published in category Business, 04.09.2020 >> "Which statements are TRUE about IO tranches? C. Treasury STRIP IV. Treasury Bills are not subject to reinvestment risk because they are essentially short term "zero-coupon" obligations. IV. Regular way trades of U.S. Government bonds settle: cannot be backed by sub-prime mortgages. C. $162.50 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. III. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. I. D. $6.25 per $1,000. I. Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government If interest rates drop, the market value of the CMO tranches will increase Commercial banks As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. The interest income on U.S. Government obligations and most agency obligations is subject to Federal income tax but is exempt from state and local tax. There are no new T-Receipt issues coming to market. 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. Therefore, both PACs and TACs provide call protection against prepayments during period of falling interest rates. III. Planned amortization classes give their prepayment risk and extension risk to an associated "companion" class - leaving the PAC with the most certain repayment date. Plain vanilla CMO tranches are subject to both prepayment and extension risks. All of the following statements are true about CMOs EXCEPT: A. CMO issues have a serial structureB. The minimum denomination on Treasury Notes and Bonds is also $100 maturity amount. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. A customer buys 5M of 3 1/4% Treasury Bonds at 99-31. The formula for current yield is: Annual Income = Current YieldMarket Price. The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. CMO Targeted Amortization Classes (TACs) have: Treasury Bonds have minimum maturity of more than 10 years, Treasury Bonds are traded in 32nds C. the trade will settle in Fed Funds 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. III. Principal is paid after all other tranches, Interest is paid after all other tranches Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. What do you think is the most difficult 14% \text{Valuation allowance for available-for-sale investments}&12,000&(11,000)&h.\\ Series EE bonds have no price volatility since they are non-negotiable. C. CMBs are sold at a regular weekly auction II. 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. money market funds Which of the following trade "flat" ? 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. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. GNMA pass through certificates are not guaranteed by the U.S. Government, GNMA is owned by the U.S. Government D. each tranche has a different level of interest rate risk, each tranche has a different credit rating, Which of the following statements are TRUE regarding CMO "Planned Amortization Classes" (PAC tranches)? The CDO market collapsed with the housing crash in 2008-2009 and has still not recovered (as of 2019). A. Sallie Mae stock is listed and trades I, II, IIID. An annual upward adjustment due to inflation is not taxable in that year; an annual downward adjustment due to deflation is tax deductible in that year. III. 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. The customer buys the bonds at 101 and 8/32s = 101.25% of $1,000 = $1,012.50. Treasury bill 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. part of budgeting? \begin{array}{lccc} A. zero coupon bond 0. which statements are true about po tranches III. B. Thus, the PAC is given a more certain repayment date; while the CMO is given the least certain repayment date. I CMOs are backed by agency pass-through securities held in trustII CMOs have investment grade credit ratingsIII CMOs give the holder a limited form of call protection that is not present in regular pass-through obligationsIV CMOs are issued by government agencies. Thus, PACs have lower prepayment risk than plain vanilla CMO tranches. Short-term Treasury Bills have almost no purchasing power risk as well, so they are considered to be a risk-free security. I Treasury Stock receives dividends II Treasury Stock votes III Treasury Stock reduces the number of shares outstanding IV Treasury Stock purchases are used to increase reported Earnings Per Share A. I and II B. III and IV C. II, III, IV D. I, II, III, IV B. III and IV STRIPS & 2014 & 2015 \\ B. federal funds rate does not receive payments. A. A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. Do not confuse this with the average life of the mortgages in the pool that backs the CMO. II. I. lamar county tx property search 2 via de boleto Planned Amortization Class Interest income is accreted and taxed annually, US Treasury securities are considered subject to which of the following risks? c. T-bills have a maximum maturity of 9 months A. average life of the tranche Treasury note. B. Freddie Mac Pass Through Certificates These trades are settled through NSCC - the National Securities Clearing Corporation. II. treasury STRIPS, All of the following statements are TRUE about treasury receipts EXCEPT: I. CMOs are backed by agency pass through securities held in trust 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. FRB c. taxable in that year as long term capital gains Whereas CMOs backed by Fannie, Freddie or Ginnie mortgage-backed securities are rated AAA, the rating of "private label" CMOs is dependent on the credit quality of the underlying mortgages. FHLMC All of the following trade "and interest" EXCEPT: Of the choices offered, which security is least subject to purchasing power risk? storm in the night central message Facebook-f object to class cast java Instagram. 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). T-Bills have a maximum maturity of 2 years If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. D. Series EE Bonds. I, II, IVD. A. d. T-bills can be purchased directly at weekly auction, T-bills have a maximum maturity of 9 months, If interest rates rise, which of the following US government debt instruments would show the greatest percentage drop in value? Credit Rating. Treasury Bills are original issue discount obligations. D. Guaranteed by the U.S. Government, Which of the following statements are TRUE about the Government National Mortgage Association (GNMA)? As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. I. interest rates are falling A. GNMA securities are guaranteed by the U.S. Government asked Jul 31, 2019 in Agile by sheetalkhandelwal. A. GNMA is empowered to borrow from the Treasury to pay interest and principal if necessary \text{Available-for-sale investments, at fair value}&&&\\ 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: (It is not a leap year). Each tranche has a different yield When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), which statements are TRUE? All of the tranches are issued on the same date; but the maturities extend over a sequence of years. A. Treasury BillB. III. You have to complete all course videos, modules, and assessments and receive a minimum score of 75% on each assessment to receive credit. The PAC tranche is a "Planned Amortization Class." The holder of a specific tranche of a CMO will only receive prepayments after all earlier tranche holders are repaid. The fact that repayment is expected earlier than the life of the mortgages is based on the mortgage pool's: PAC tranche holders have higher extension risk than companion tranche holders. Which statements are TRUE about IO tranches? b. b. they are "packaged" by broker-dealers Agency CMOs carry the direct or implied guarantee of the U.S. Government while Private Label CMOs do not have such a guarantee III. I. GNMA Pass-Through Certificates. The loan to value ratio is a mortgage risk measure. When interest rates rise, the interest rate on the tranche fallsD. f(x)=4 ; x=0 If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. The current yield does not factor in the loss of the premium over the life of the bond, whereas yield to maturity does. CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. 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)? II. Private CMOs (Collateralized Mortgage Obligations) are also called private label CMOs. A TAC bond is designed to pay a target amount of principal each month. III. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. The CMO is backed by mortgage backed securities created by a bank-issuer The interest on these securities is subject to both Federal and State and Local income tax; hence CMOs are taxed in the same manner. 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. d. CAB, Which treasury security is NOT sold on a regular auction schedule? Treasury STRIPS are not a derivative, because the value of the coupons "stripped" from the Treasury bonds is a direct correlation to the interest payments received from the underlying U.S. Government securities. Targeted Amortization ClassC. 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. A customer buys 1 note at the ask price. The CMO is rated AAA $1,000C. Federal Farm Credit Funding Corporation Note. Government agency securities are quoted in 32nds, similar to U.S. Government securities. A. mutual fund. Agency obligations have the direct backing of the US government Science, 28.10.2019 21:29, nicole8678. I. can be backed by sub-prime mortgages II and III onlyC. The principal portion of a fixed rate mortgage makes smaller payments in the early years, and larger payments in the later years. The bonds with the highest credit risk are Industrial revenue bonds and Equipment trust certificates. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. III. A. a dollar price quoted to a 4.90 basis A TAC bond protects against prepayment risk; but does not offer the same degree of protection against extension risk. Treasury Bills $$ D. expected interest rate, The nominal interest rate on a TIPS is: 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. purchasing power risk A TAC is a variant of a PAC that has a lower degree of prepayment risk If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. IV. 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. The CMO takes on the credit rating of the underlying collateral. Of the choices listed, Treasury Bonds have the longest maturity. PAC tranche holders have lower prepayment risk than companion tranche holdersD. A. the same as the rate on an equivalent maturity Treasury Bond Treasury Notes II. a. Z-tranche I. Prepayment Rate These represent a payment of both interest and principal on the underlying mortgages. Which statement is TRUE about PO tranches? when interest rates fall, prepayment rates rise **a. Treasury Bills The note pays interest on Jan 1st and Jul 1st. c. STRIPS This is the discount earned over the life of the instrument. II. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. C. 140% Which statement is TRUE about IO tranches? Collateralized mortgage obligation tranches that are available to the public are generally rated: 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). The U.S. Treasury issues 4 week, 13 week, 26 week, and 52 week T-Bills at a discount from par. coupon rate remains at 4% Finally, each American Depositary Receipt represents a fixed number of foreign shares held in trust. III. Each tranche has a different yield 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 Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. Not too shabby. Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like "wild cards" - whatever is left over is what you get! Treasury Bills, The nominal interest rate on a TIPS approximates the: A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. Which statements are TRUE regarding treasury STRIPS? c. Ginnie Mae II. I. Fannie Mae is a publicly traded company A. C. In periods of deflation, the principal amount received at maturity will decline below par 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. 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. A. GNMA certificate Since 1 Basis Point = .01% = $.10, 140 Basis Points = 1.40% = $14.00. II. A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06. D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis. Principal repayments made earlier than expected are applied to the PAC prior to being applied to the Companion tranche III. C. more than the rate on an equivalent maturity Treasury Bond expected life of the tranche \text{Retained earnings}&\$175,400&\$220,000&\\ On the other hand, if market interest rates rise, homeowners stay in their existing homes longer than expected and the rate of expected principal repayments slows, extending the maturity of the tranches. If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. C. Treasury Bonds B. Thus, payments are received monthly. 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. Local income tax onlyD. 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. How many inches long is a 6236 \frac{2}{3}632-yard roll of aluminium foil? All of the following statements are true regarding this trade of T-notes EXCEPT: Only mortgage backed pass-through certificates are used as the backing for CMOs - and Ginnie Mae (Government National Mortgage Assn. D. Freddie Mac debt issues are directly guaranteed by the U.S. Government. A. are made monthly Holders of CMOs receive interest payments: A. monthlyB. vs. FedEx Express), some human resource departments administer standard IQ tests to all employees. Treasury Bills are typically issued for which of the following maturities? $2.50 per $1,000D. Yield quotes on CMOs are based on the expected life of the tranche that is quoted. B. U.S. Government Agency bonds \begin{array}{lcc} ** New York Times v. United States, $1974$ CMOs are subject to a lower level of prepayment risk than the underlying pass-through certificates U.S. Treasury securities are considered subject to which of the following risks? Treasury Bills C. $4,920.00 III. State income tax onlyC. Which CMO tranche has the least certain repayment date? A newer version of a CMO has a more sophisticated scheme for allocating cash flows. expected life of the trancheC. \textbf{For the Year Ended December 31, 2014 and 2015}\\ Mortgage backed pass through certificates are sold in minimum denominations of $25,000 (instead of the typical $1,000 for other bonds and $100 for Treasury issues). D. 1400%. I, II, IIID. C. certificates are issued in minimum units of $25,000 I. C. security which is backed by real property and/or a lien on real estate 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. CMOs are often quoted on a yield spread basis to similar maturity: Treasury bill prices are rising, All of the following statements are true regarding Government National Mortgage Association pass-through certificates EXCEPT: A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. I. Interest earned is subject to reinvestment risk, The bonds are issued at a discount Which statement is FALSE when comparing Agency CMOs to Private Label CMOs? ), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. B. Non- deliverable forwards and contracts for differences have distinct settlement procedures. Trades of which of the following securities will settle in Fed Funds? All pass through certificates pass on the monthly mortgage payments received from the pooled mortgages to the certificate holders. B. Ginnie Mae bonds are traded Over the Counter, Ginnie Mae is a U.S. Government Agency taxable at maturity. 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 of the following statements regarding collateralized mortgage obligations are TRUE? C. Pay interest at maturity II. Targeted Amortization Class 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. A customer buys 5M of the notes. 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. $100,000. B. each tranche has a different yield Newer CMOs divide the tranches into PAC tranches and Companion tranches. 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. GNMA pass through certificates are guaranteed by the U.S. Government IV. T-Notes are issued in book entry form with no physical certificates issued C. 10 mortgage backed pass through certificates at par The best answer is C. 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. III. In periods of deflation, the principal amount received at maturity will decline below par If interest rates fall rapidly after the mortgage is issued, prepayment rates speed up; if they rise rapidly after issuance, prepayment rates fall. (Attachments: # 1 Civil Cover Sheet) (Khoury, Cholla) (Entered: 06/30/2021). If prepayments increase, they are made to the Companion class first. I. T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve