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Credit Rating. III. III. 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 If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranchesB. \text{Retained earnings}&\$175,400&\$220,000&\\ Each tranche has a different expected maturity, All of the following statements are true about "plain vanilla" CMO tranches EXCEPT: II. This avoids having to pay tax each year on the upwards principal adjustment.). (TIPS are usually purchased in tax qualified retirement plans that are tax-deferred. IV. Treasury Bills Universal Containers has built a recruiting application with 2 custom objects, Job Applications and Reviews, that have a master-detail relationship. What type of bond offers a "pure" interest rate? C. Treasury Bonds When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. 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" Thus, the price movement of that specific tranche, in response to interest rate changes, more closely parallels that of a regular bond with a fixed repayment date. D. Collateral trust certificate, Treasury bond 1. Principal repayments made later than expected are applied to the PAC prior to being applied to the Companion tranche. Highland Industries Inc. makes investments in available-for-sale securities. If interest rates rise, then homeowners will defer moving at the anticipated rate, since they have a good deal with their existing mortgage. Money market instrumentB. III. The CMO is backed by mortgage backed securities created by a bank-issuer Which of the following securities has the lowest level of credit risk? B. U.S. Government Agency bonds T-Notes are issued in book entry form with no physical certificates issued D. $4,945.00. A newer version of a CMO has a more sophisticated scheme for allocating cash flows. Yield quotes for collateralized mortgage obligations are based upon: A. average life of the trancheB. A. FNMA is a publicly traded company A Treasury Bond is quoted at 95-24. II. 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. IV. CMOs are not issued by government agencies; the agency issues the underlying pass-through certificates. III. 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? IV. On the other hand, extension risk is increased. \text{Available-for-sale investments, at fair value}&&&\\ which statements are true about po tranches 16 .. Treasury STRIP. Therefore, an 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 down as well. c. PAC tranche ** New York Times v. United States, $1974$ Since each tranche represents a differing maturity, the yield on each will differ, as well. The CMO is backed by mortgage backed securities issued by Ginnie Mae, Fannie Mae or Freddie Mac 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. 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. D. Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded. $10,000D. The service limit is a quota set on a resource. T-Bills trade at a discount from par 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 III. individual wishing to avoid reinvestment risk, money market funds derivative product B. The current yield does not factor in the loss of the premium over the life of the bond, whereas yield to maturity does. The best answer is C. The bond is quoted at 95 and 24/32nds. 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? 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. Annual interest on the bonds is 3.25% of $5,000 face amount equals $162.50. The securities are purchased at a discount no extension risk. C. eliminate prepayment risk to holders of that tranche Agency CMOs carry the direct or implied guarantee of the U.S. Government while Private Label CMOs do not have such a guarantee $$ PAC tranches increase prepayment risk to holders of that tranche 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. Thus, the price movement of that specific tranche, in response to interest rate changes, more closely parallels that of a regular bond with a fixed repayment date. Thus, when interest rates fall, prepayment risk is increased. Once the Treasury started issuing STRIPS in 1986, there was no need for the middleman anymore. Since interest is paid semi-annually, each payment will be for $81.25. Tranches onward. Which two statements are true about service limits and usage? D. accrued interest on the certificates is computed on a 30 day month/360 day year basis, the certificates are available in $1,000 minimum denominations, Which of the following trades settle in "clearing house" funds? B. Freddie Mac is an issuer of mortgage backed pass-through certificates II. Interest income is accreted and taxed annually, US Treasury securities are considered subject to which of the following risks? PACs differ from TACs in that TACs do not offer protection against a decrease in prepayment speedsC. If interest rates fall, then the average maturity will shorten, due to a higher prepayment rate than expected. ** New York Times v. Sullivan, $1964$ Salesforce 401 Dev Certification Questions Answers Part 1. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. 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. d. Congress, All of the following are true statements about treasury bills EXCEPT: All of the following trade "and interest" EXCEPT: Of the choices offered, which security is least subject to purchasing power risk? B. Freddie Mac Pass Through Certificates Principal repayments on a CMO are made: treasury bonds II. 95 C. A TAC is a variant of a PAC that has a higher degree of extension risk This "prepayment speed assumption" is used to "guesstimate" the expected life of a mortgage backed pass-through certificate. Which of the following statements are TRUE when comparing the Planned Amortization Classes (PAC tranches) to the Companion Classes of a CMO? D. Zero Tranche. Sallie Mae issues debentures, and uses the funds to make a secondary market, buying student loans from originating lenders (Sallie Mae stands for Student Loan Marketing Association). $.025 per $1,000B. IV. C. Treasury Bonds The formula for current yield is: Annual Income = Current YieldMarket Price. The interest portion of a fixed rate mortgage makes larger payments in the early years, and smaller payments in the later years. CMO issues have the same market risk as regular pass-through certificates. I. Thus, the earlier tranches are retired first. B. serial structures D. 1400%. I. 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. $81.25 8/32nds = 1/4th = .25% of $1,000 par = $2.50. I. PAC tranches reduce prepayment risk to holders of that tranche T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve A. discount rate 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. They tend not to prepay mortgages when interest rates rise, since there is no benefit to a refinancing. D. the trade will settle next business day if performed "regular way", the yield to maturity will be higher than the current yield C. more than the rate on an equivalent maturity Treasury Bond B. d. Freddie Mae, Which of the following would NOT purchase STRIPS? Treasury bill prices are rising, All of the following statements are true regarding Government National Mortgage Association pass-through certificates EXCEPT: CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. All of the following statements are true regarding collateralized mortgage obligations EXCEPT: A. CMOs are issued by local government agenciesB. When compared to plain vanilla CMO tranches, Planned Amortization Classes have: \hline CDO tranches are: Thus, when interest rates rise, prepayment risk is decreased. Principal only strips are. CMOs are packaged and issued by broker-dealers. The PAC tranche is a Planned Amortization Class. Surrounding this tranche are 1 or 2 Companion tranches. CMOs are often quoted on a yield spread basis to similar maturity: An annual upward adjustment due to inflation is taxable in that year; an annual downward adjustment due to deflation is not tax deductible in that year.B. II. 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. Fannie Maes. mortgage backed securities issued by a privatized government agencyD. IV. d. TIPS, If the principal amount of a treasury inflation protection security is adjusted upwards due to inflation, the adjustment amount is: B. quarterly A. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. I. If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. Question: Which statement is true about FTP? Planned Amortization ClassB. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. IV. II. b. CMOs make payments to holders monthly rated based on the credit quality of the underlying mortgages Tranches are groups of securities of a firm in which investors invest. CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. The interest on these securities is subject to both Federal and State and Local income tax; hence CMOs are taxed in the same manner. Treasury Bonds are traded in 32nds Mortgage backed pass-through certificateC. III. Let's be real with ourselves. 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. I. interest rates are falling Contract settlement by cash has different economic effects from those of a settlement by delivery. Interest is paid before all other tranches Question 6 You bought a CMO tranche that does not receive any cash flows until all other tranches have been repaid and whose principal grows at a predetermined rate each period. A mortgage backed security that is backed by an underlying pool of 30 year mortgages has an expected life of 10 years. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. can be backed by sub-prime mortgages C. Municipal bonds In periods of inflation, the principal amount received at maturity will be par & 2014 & 2015 \\ The smallest denomination available for Treasury Bills is: A. CMOs receive the same credit rating as the underlying pass-through securities held in trust I Payments are larger in the early yearsII Payments are smaller in the early yearsIII Payments are larger in the later yearsIV Payments are smaller in the later years. Interest rate risk, 140 Basis points equal: