which statements are true about po tranches

Which of the following is an example of a derivative product? A. Fannie Mae CertificateB. Which of the following statements regarding collateralized mortgage obligations are TRUE? The note pays interest on Jan 1 and Jul 1. holders of "plain vanilla" CMO tranches have higher prepayment risk, Which CMO tranche is most susceptible to interest rate risk? III. 95 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. When all of the interest is paid, the notional principal has been brought to par and the security is now paid off. If a customer buys 5 T-notes on Friday, April 4th in a regular way trade, how many days of accrued interest are owed to he seller? 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? interest payments are exempt from state and local tax 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? The price movements of IOs are counterintuitive! II. On the other hand, extension risk is decreased. 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). I, II, IVD. c. PAC tranche However, Interest Only tranche is quite different from a typical bond, simply because when market interest rate increases the rate of prepayment decreases, which in turn makes the rate of maturity to be longer. II. I. Prepayment Rate I when interest rates fallII when interest rates riseIII so they can refinance at lower ratesIV so they can refinance at higher rates. The interest portion of a fixed rate mortgage makes larger payments in the early years, and smaller payments in the later years. Interest rate risk, Extended maturity risk Trading is confined to the primary dealers As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. Federal Farm Credit Funding Corporation BondsD. By . II. Which of the following statements are true? money market funds The longer the maturity, the greater the price volatility of a negotiable debt instrument. IV. REITs are common stock companies that make direct investments in real estate. III. A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. IV. Interest Rate TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. I. Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government B. B. the certificates are available in $1,000 minimum denominations Targeted amortization classC. Which of the following statements are TRUE about PAC tranches PAC tranche holders have lower prepayment risk than companion tranche holders PAC tranche holders have lower extension risk than companion tranche holders If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranches If prepayments increase, they are made to the Companion class first. Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. Ginnie Mae is a U.S. Government Agency 29 terms. D. expected interest rate, The nominal interest rate on a TIPS is: Thus, the earlier tranches are retired first. Minimum $100 denominations Government agency securities are quoted in 32nds, similar to U.S. Government securities. For most investors this is too much money to invest, so they buy shares of a Ginnie Mae mutual fund instead. Agency CMOs are created by Ginnie Mae, Fannie Mae, or Freddie Mac, using their own mortgage backed securities (MBSs) as the underlying collateral. 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. II. The note pays interest on Jan 1st and Jul 1st. 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). Newer CMOs divide the tranches into PAC tranches and Companion tranches. Treasury STRIPS are suitable investments for individuals seeking current income When interest rates rise, the price of the tranche fallsB. Treasury Bills are typically issued for which of the following maturities? Treasury STRIPS are quoted on a yield to maturity basis, Treasury Bills are quoted on a yield to maturity basis B. CMBs are sold at a discount to par CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. The purchaser of a CMO tranche experiences extension risk during periods when interest rates: A. riseB. B. Non- deliverable forwards and contracts for differences have distinct settlement procedures. the market is regulated by the SEC, the trading market is very active, with narrow spreads, Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? T-bills are callable at any time II. 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. II. Treasury Receipts, Treasury Bills Principal is paid after all other tranches, Interest is paid after all other tranches 2 basis points D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. D. premium bond. IV. B. Freddie Mac Pass Through Certificates The formula for current yield is: Annual Income = Current YieldMarket Price. 8/32nds = 1/4th = .25% of $1,000 par = $2.50. II and III onlyC. 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). Determine the missing lettered items. default risk, A 5 year, 3 1/4% treasury note is quoted at 101-4 - 101-8. Which CMO tranche is LEAST susceptible to interest rate risk? A 5 year 3 1/2% Treasury Note is quoted at 98-4 - 98-9. B. interest payments are exempt from state and local tax A PO is a Principal Only tranche. How many inches long is a 6236 \frac{2}{3}632-yard roll of aluminium foil? Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government 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. Sallie Mae stock does not trade, Sallie Mae is a privatized agency 89 Standard deviation is a measure of the risk based on the expected variation of return on investment. CMO Targeted Amortization Classes (TACs) have: Not too shabby. A. credit risk 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). A "derivative" product is one whose value is "derived" via a "formula" from an underlying investment. II. There were no dividends. IV. General Obligation Bond **c.** United States v. Nixon, $1974$ Conversely, when interest rates fall (prepayment risk) the principal is being paid back at an earlier than expected date, so less interest is being received and the price falls (if interest rates fall drastically, the holder might get less interest back than what was originally invested). II. \text{Available-for-sale investments, at fair value}&&&\\ A. $100,000. TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates. 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. CMO "Planned Amortization Classes" (PAC tranches): C. security which is backed by real property and/or a lien on real estate I. all rated AAA 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. 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. Congress, All of the following are true statements about treasury bills EXCEPT: Therefore, both PACs and TACs provide call protection against prepayments during period of falling interest rates. Which statements are TRUE regarding CMOs? However, if prepayment rates slow, the TAC absorbs the available cash flow, and goes in arrears for the balance. C. Freddie Mac is a corporation that is publicly traded Which of the following statements are TRUE about CMOs in a period of rising interest rates? PAC tranches reduce prepayment risk to holders of that tranche A. reduce prepayment risk to holders of that tranche step up step down bond I, II, III, IV. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. FNMA is owned by the U.S. Government I. c. T-bills have a maximum maturity of 9 months GNMA Pass-Through Certificates. IV. I. pension funds Treasury Receipts represent an undivided interest in a portfolio of U.S. Government securities held by a trustee. I. are made monthly \hline A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. IV. B. C. Companion Class This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. Treasury note. IV. II. I. T-Bills can be purchased directly at weekly auction A. term structures Thus, because the PAC has lowered prepayment and extension risk, its yield will be lower than the surrounding Companion classes. All of the statements are true about CMOs. III. I. interest rates are falling I. Since semi-annual interest payments are not received, there is no reinvestment risk. Ginnie Mae bonds are traded Over the Counter, The "modification" of Ginnie Mae modified pass through certificates is: IV. CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. General Obligation Bonds If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. 13 weeks $4,914.06 B. 19-29 Cash Flows for GNMA IO and PO Treasury Bills Which statements are TRUE regarding Treasury debt instruments? c. 96 GNMA pass through certificates are guaranteed by the U.S. Government 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. U.S. Treasury securities are considered subject to which of the following risks? In periods of deflation, the principal amount received at maturity is unchanged at par, In periods of deflation, the amount of each interest payment will decline B. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. \begin{array}{lccc} which statements are true about po tranches. $25 per $1,000. A. C. Treasury Bonds III. TIPS The implicit rate of return is locked-in when the security is purchased. II. Which CMO tranche has the least certain repayment date? D. Treasury Receipts. D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. 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. IV. 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. serial structures B. higher prepayment risk, but the same extension risk as a Planned Amortization Class During periods of falling rates, all certificate holders receive their share of those repayments pro-rata. mortgage backed securities created by a bank-issuerC. IV. U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible. They are the shortest-term U.S. government security, often with maturities as short as 5 days. A 5 year $1,000 par 3 1/2% Treasury Note is quoted at 101-4 - 101-8. III. b. interest payments are exempt from state and local taxes If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs