Crunch Time - Chapter 8

Question 1

What are Treasury Protected Securities designed to do? subject to what type of risk?

Answer 1

• Keep pace with inflation, subject to Interest Rate Risk

Question 2

What type of risk are private labeled CMO’s subject to?

Answer 2

• Credit risk of issuer

Question 3

If interest rate incline, what type of risk are CMO’s subject to?

Answer 3

• Extension Risk

Question 4

If interest rate decline, what type of risk are CMO’s subject to?

Answer 4

• Prepayment Risk

Question 5

How is interest received on mortgage back securities (GNMA, FNMA, FHLMC) taxed?

Answer 5

• Fully taxed, but portion of monthly income is a return of capital and tax free

Question 6

What CMO tranche has the lowest amount of prepayment risk?

Answer 6

• Planned Amortization Class (PAC)

Question 7

What CMO tranche provides the greatest safety of principle?

Answer 7

• A Tranche (Fast Pay Tranche)

Question 8

For retail communication and correspondence, what may CMO’s not be compared to?

Answer 8

• Any other security especially bank CD’s