d. 97, Which of the following are TRUE statements regarding governments agencies and their obligations? T-Notes are issued in bearer form. III. I. The service limit is a quota set on a resource. 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. For the exam, these securities are still rated AAA. D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis. The logic behind this tax treatment is that the mortgage interest paid by the homeowners was fully deductible from both federal, state, and local taxes. Interest income is accreted and taxed annually Treasury Receipts, All of the following are true statements about U.S. Government Agency securities EXCEPT: a. prepayment speed assumption II. Treasury bond Treasury STRIPS are suitable investments for individuals seeking current income CMO Targeted Amortization Classes (TACs) have: c. the trade will settle in Fed Funds c. treasury bonds Principal repayments on a CMO are made: Which of the following statements are TRUE regarding Treasury Stock? If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. taxable in that year as interest income receivedC. b. Sallie Mae Mortgage backed pass-through certificate 8 Q 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. A. collateral trust certificateB. b. T-bills are the most actively traded money market instrument Highland Industries Inc. makes investments in available-for-sale securities. Accrued interest on the certificates is computed on an actual day month / actual day year basis 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. I. FNMA taxable at maturity. II. can be backed by sub-prime mortgages When interest rates rise, the price of the tranche rises III. A customer with $50,000 to invest could buy 2 of these certificates at par. A 5-year, $1,000 par, 3 1/2% Treasury note is quoted at 101-4 - 101-8. treasury STRIPS, All of the following statements are TRUE about treasury receipts EXCEPT: A $1,000 par Treasury Note is quoted at 100-1 - 100-9. CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. 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. A. corporation or trust through which investors pool their money in order to obtain diversification and professional management Trading is confined to the primary dealers Thus, the rate of principal repayments varies, depending on market interest rate movements. Accrued interest on the certificates is computed on a 30 day month / 360 day year basis, All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT: 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. Because of the sequencing of principal repayments from the underlying mortgages, the holder has a more definite maturity date on the issue, as compared to actually buying a mortgage backed pass-through certificate. IV. Securities and Exchange Commission Which of the following are TRUE statements regarding government agencies and their obligations? The best answer is C. CMBs are Cash Management Bills. IV. I, II, IVC. 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. . 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. At maturity, the receipt will have an adjusted cost basis of par, and will be redeemed at par, for no capital gain or loss. when interest rates rise, prepayment rates fall Which CMO tranche has the least certain repayment date? when interest rates fall, prepayment rates rise, CMO "planned amortized classes" (PAC tranches): actual maturity of the underlying mortgages. There are no new T-Receipt issues coming to market. $2.50 per $1,000D. D. 1400%. U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible. \begin{array}{lcc} Which statements are TRUE about IO tranches? Targeted Amortization Class. D. Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. II. Treasury BillB. GNMA pass through certificates are not guaranteed by the U.S. Government, GNMA is owned by the U.S. Government A. receives payments prior to all other tranchesB. c. risks of default if homeowners do not make their mortgage payments CMO "Planned Amortization Classes" (PAC tranches): principal amount is adjusted to $1,050 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. D. Freddie Mac debt issues are directly guaranteed by the U.S. Government. II and IV. Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman, Fundamentals of Financial Management, Concise Edition, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield. If interest rates are rising rapidly, which U.S. Government debt prices would be MOST volatile? a. not taxable c. taxable in that year as long term capital gains Treasury securities are the safest investment - they have virtually no credit risk (default risk) and almost no marketability risk. A government securities dealer quotes a 3 month Treasury Bill at 5.00 Bid - 4.90 Ask. C. $.625 per $1,000 & 2014 & 2015 \\ B. Which of the following is an original issue discount obligation? The segmented class of assets determines the amount that traders will receive when their bonds reach maturity. Because the principal is being paid back at an earlier date, the price rises. B. TAC tranche All government and agency securities are quoted in 32nds II. The CMO is rated AAA Planned Amortization ClassB. The note pays interest on Jan 1st and Jul 1st. ** New York Times v. United States, $1974$ III. individuals seeking current income The CMO is rated dependent on the credit quality of the mortgages underlying mortgage backed pass through securities held in trust. C. $4,920.00 From the basis quote, the dollar price is computed. II. A copy of the full audited annual financial statements is available on or may be requested from the company secretary ([email protected], tel +27 (0) 21 980 4284) at PO Box 215, Brackenfell, 7561, South Africa. coupon rate remains at 4% IV. Interest received by the holder of a mortgage backed pass through security is fully taxable by both federal, state, and local government. All of the following statements are true regarding this trade of T-Notes EXCEPT: Mutual fund shares are not a derivative, because Net Asset Value per share is a direct correlation to the value of total net assets divided by the number of shares outstanding. There is little reinvestment risk with U.S. Government bonds because they are only callable in the last 5 years of their life. 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? Which CMO tranche has the least certain repayment date? Which statements are TRUE about private CMOs? Newer CMOs divide the tranches into PAC tranches and Companion tranches. $$ Equipment Trust Certificate Furthermore, as interest rates drop, the value of the fixed income stream received from those mortgages increases, so the market value of the security will increase. C. $162.50 There is usually a cap on how high the rate can go and a floor on how low the rate can drop. through the Federal Reserve System Reinvestment risk is greater for Ginnie Maes than for U.S. 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. Treasury Bonds are issued in either bearer or registered form A customer who wishes to buy 1 Treasury Bill will pay: The best answer is A. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. T-bills are callable at any time I. default risk, A 5 year, 3 1/4% treasury note is quoted at 101-4 - 101-8. d. CAB, Which treasury security is NOT sold on a regular auction schedule? Planned Amortization ClassB. D. Any of the above. \hline B. Freddie Mac Pass Through Certificates II. Thus, the certificate was priced as a 12 year maturity. III. 94 $.0625 per $1,000 It's often empty, meaningless hype driven by consultants and schools and the cottage industry of courses, books, and certificate programs. A TAC is a variant of a PAC that has a higher degree of extension risk Which statements are TRUE about PO tranches? All of them D. Collateral trust certificate, Treasury bond If prepayment rates rise, the PAC tranche will receive its sinking fund payment after its companion tranchesC. B. higher prepayment risk, but the same extension risk as a Planned Amortization Class The Stanford-Binet test scores are well modeled by a Normal model with a mean of 100 and a standard deviation of 16. IV. 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. Each CMO tranche has an expected maturity, but the actual repayments are based on the rate of principal repayments that come in from the underlying mortgages - and this rate can vary. holders of "plain vanilla" CMO tranches have higher prepayment risk, Which CMO tranche is most susceptible to interest rate risk? Government National Mortgage Association Pass Through Certificates. I, III, IVD. prepayment speed assumptionC. Thus, there is no purchasing power risk with these securities. The principal portion of a fixed rate mortgage makes smaller payments in the early years, and larger payments in the later years. III. IV. If prepayments increase, they are made to the Companion class first. In periods of deflation, the principal amount received at maturity is unchanged at par, Which statement is FALSE regarding Treasury Inflation Protection securities? A 70-year old customer who is looking for current income has inquired about purchasing a GNMA pass-through certificate because he has heard that it provides monthly payments. d. TAC tranche, A structured product that invests in tranches of private label subprime mortgages is a: Ginnie Mae stock is traded on the New York Stock Exchange Duration is a measure of bond price volatility. C. marketability risk 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? 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. C. certificates are issued in minimum units of $25,000 A. b. The longer the maturity, the greater the price volatility of a negotiable debt instrument. III. It gets no payments until all prior tranches are retired. An official statement issued by the finance ministry said the estimated shortfall of 1.1 trillion, assuming all states opt for borrowing, will be borrowed by central government in tranches and passed on to states "as a back-to-back loan in lieu of GST Compensation cess releases." When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. holders of PAC CMO trances have higher prepayment risk II. Tranches are groups of securities of a firm in which investors invest. 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. PAC tranches reduce prepayment risk to holders of that tranche FNMA pass through certificates are not guaranteed by the U.S. Government, Which of the following are TRUE statements regarding government agencies and their obligations? The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. 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). A PO is a Principal Only tranche. They are auctioned off weekly by the Federal Reserve acting as agent for the U.S. Treasury. b. floating rate tranche derivative product which statements are true about po tranches. 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 The spread is: A. III. IV. II. A. a dollar price quoted to a 4.90 basis Money market instrumentB. What is NOT a risk of investing in a GNMA? CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations.
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