Unit 12

Question 1

Pooling assets such as auto loans and mortgages into investment vehicles for sale to the public

Answer 1

Securitization

Question 2

How is interest from CMOS taxes?

Answer 2

Federal, state and local levels

Question 3

1. Receives no payment until all preceding CMO tranches are retired
2. Most volatile CMO tranche
3. Would not be suitable for an investor needing funds in specified amount of time

Answer 3

Zero Tranche CMO (Z-Tranche)

Question 4

1. Transfers prepayment risk only to a companion tranche and does not offer protection from extension risk
2. Investors accept the extension risk in exchange for slightly higher interest rate

Answer 4

Targeted Amortization Class CMO (TAC)

Question 5

1. Have targeted maturity dates
2. Retired first and offer protection from prepayment and extension risk

Answer 5

Planned Amortization Class CMO (PACS)

Question 6

1. Receives interest
2. Sells at a discount from par
3. Cash flow declines over time
4. Increases when interest rates rise
5. Can be used to hedge portfolio against interest rate risk
6. Owner does not know how long the stream of interest payments will last

Answer 6

Interest Only CMO (IO)

Question 7

Income stream comes from principal payments on the underlying mortgages- both scheduled mortgage principal payments and prepayments

Sells at discount from par

Tends to be volatile

Rises when interest rates fall

Answer 7

Principal Only CMO (PO)

Question 8

One of the classes of securities that forms an issue of collate rises mortgage obligations. Each is characterized by its interest rate, average maturity, risk level and sensitivity to mortgage prepayments. Neither the rate of return nor the maturity date of a CMO is guaranteed.

Repays principal to one at a time

$1,000 increments

Answer 8

Tranche

Question 9

Backed by debit obligations

Ex: credit card CDO

Answer 9

Non-amortizing Loan

Question 10

1. Regular payments are made against the principal
2. Investors return consists of principal along with interest

Ex: Auto Loan

Answer 10

Amortizing Loan

Question 11

1. Does not specialize in any single type of debt
2. Portfolios consist of non mortgage loans or bonds (auto loans, credit cards)
3. Not very liquid

Answer 11

Collateralized Debt Obligations (CDO)

Question 12

A mortgage backed corporate security. Unlike pass through obligations issued by FINRA and GNMA, it’s yield is not guaranteed and it does not have the federal governments backing. These issues attempt to return interest and principal at a predetermined rate

Answer 12

Collateralized Mortgage Obligation (CMO)

Question 13

Issuers raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be but might target a particular industry or sector

Answer 13

Blind Pool Companies

Question 14

Companies without business operations that raise money through IPOs in order to have their share publicly traded for the sole purpose of seeking out a business or combination of businesses

Does not identify any proposed investment intent

Answer 14

Blank Check Companies

Question 15

How are management fees structured for hedge funds?

Answer 15

Most funds take a 2% management fee and 20% of any profits

Question 16

Provides that during a certain initial period, an investor may not make a withdrawal from a hedge fund. Length of time will vary.

Answer 16

Lock-up period

Question 17

1. A form of fund generally organized as a limited partnership with no more than 100 investors.
2. Does. Or have to register with the SEC
3. Investments are pooled and professionally managed (aggressively)
4. Unregulated
5. Suitable for sophisticated investors
6. Speculative
7. Illiquid

Answer 17

Hedge Funds