Chapter 8 Mastery Progress Exam
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be:
$1,057.50 U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of:
$2.50 GNMA pass-through certificates (as well as T-notes and T-bonds) are quoted in 32nds of a point. The spread of .08 represents 8/32 or 1/4 (.25) of a point. One point (1%) for a bond is equal to $10 ($1,000 x 1%); therefore, 1/4 of a point is equal to $2.50 per $1,000.
The PSA Model is used when pricing:
Collateralized mortgage obligations
Which of the following securities has prepayment risk?
Collateralized mortgage obligations
Which of the following government agencies is NOT involved in the housing market?
Federal Home Loan Banks (FHLB)
All of the following choices are part of the Federal Farm Credit System, EXCEPT:
Federal National Mortgage Association
Which of the following securities is NOT backed by the credit of the U.S. government?
Federal National Mortgage Association (FNMA) bonds
Which of the following securities is NOT guaranteed by the U.S. government?
Federal National Mortgage Association (Fannie Mae) bonds
Private label mortgage-backed securities are issued by which of the following entities?
Financial institutions (commercial banks, investment banks, and home builders)
An investor buys $10,000 par value of 4% Treasury bonds due July 1, 2040. For tax purposes, the interest earned on these bonds is: I. Subject to federal income tax II. Exempt from federal income tax III. Subject to state income tax IV. Exempt from state income tax
I and IV
When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which TWO of the following statements are TRUE? I. Prepayment risk is greater for the CMO with the 10% yield II. Prepayment risk is greater for the CMO with the 6% yield III. Credit risk is greater for the 10% CMO IV. Credit risk is the same for both securities
I and IV
Which TWO of the following statements are TRUE of U.S. Treasury bills? I. They do not have a stated rate of interest II. They mature in more than one year III. The interest received is taxed in the year they are sold IV. They are issued at a discount
I and IV
Which TWO of the following securities are typically sold at a discount? I. TIPS II. Treasury bills III. Bankers' acceptances IV. Collateralized mortgage obligations
II and III
Which TWO of the following statements are TRUE regarding Treasury bills? I. They're interest-bearing securities. II. They're discount securities. III. They're issued in minimum denominations of $100. IV. They're issued in minimum denominations of $1,000.
II and III
Which TWO of the following statements are TRUE of Treasury bills? I. The interest received is taxed in the year the securities are purchased II. The interest received is exempt from state and local taxes III. The interest received is based on the difference between the purchase price and face value IV. The difference between the purchase price and face value is considered a capital gain
II and IIl
Which of the following risks is considered unique to an investor holding a CMO?
Prepayment risk
You are the portfolio manager for Home Fund, Inc., a mortgage-backed securities mutual fund. Which type of risk concerns you in a falling interest rate environment?
Prepayment risk
Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)?
It issues securities that can be redeemed to pay for college education
During periods of deflation, which of the following investments tends to perform the best?
Long-term debt
All of the following government agencies are involved in the housing market, EXCEPT:
SBA
Which of the following agencies would NOT be used to back a CMO?
SLMA
Which of the following characteristics is NOT an advantage of CMOs?
Tax-free interest
If interest rates decline, the risk for an investor in a mortgage-backed security is:
That payment of principal will increase and reinvested funds will earn less
Which CMO tranche provides the greatest safety of principal?
The A tranche
A 3-month Treasury bill is issued at a discount to yield 9.5%, and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is TRUE?
The bill has a greater yield than the bond T-bills are issued and quoted on a discount yield basis, whereas corporate bonds are quoted on a yield-to-maturity basis. These yields are calculated in different manners. The bond equivalent yield of a T-bill is always higher than its discount yield.
A bank sells its credit card receivables to a trust. If the trust creates a bond backed by these receivables:
This is an asset-backed security
The current yield for a 9% Treasury bond trading at 101:14 is:
8.87% Current yield is the interest rate divided by the asked price. It is 8.87% (9% interest rate divided by the asked price of 101 14/32 or 101.4375). Treasury bonds are quoted as a percentage of par in 32nds of a point.
A customer purchased a government security, and later discovered that it was nonnegotiable. This security could have been:
An EE savings bond
A collateralized debt obligation (CDO) is BEST defined as a type of:
Asset-backed security
An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that:
Buyers of new bills paid more than buyers paid the previous month
A mortgage-backed security that is available in several "tranches," each with different cash flow characteristics, is a:
Collateralized Mortgage Obligation
Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security?
Each year the customer will pay only federal income tax
An investor has a $5 million position in long-term Treasury bonds. Which of the following types of risk is the investor's greatest concern?
Inflationary risk
If an investor owns Treasury bonds that will mature in 20 years, she is exposed to:
Inflationary risk
Collateralized mortgage obligations (CMOs) make interest payments to investors:
Monthly
Which of the following securities have the highest degree of credit risk?
Private Label MBS
Interest on U.S. government bonds is:
Subject to federal income tax but exempt from state income tax
Interest on Treasury Inflation Protected Securities (TIPS) is:
Subject to federal income tax, but exempt from state income tax
Interest on U.S. Treasury securities is:
Subject to federal income tax, but exempt from state income tax
All of the following are advantages of CMOs, EXCEPT:
They produce tax-free interest
Which of the following securities does NOT trade with accrued interest?
Treasury STRIPS
A corporation has raised money that it needs to use within the next six months. In which of the following should the corporation invest the funds until they are needed?
U.S. Treasury bills
Which of the following securities are quoted and traded at a discount?
U.S. Treasury bills
The tranche with the longest maturity and, therefore, the last to receive interest and principal payments within a CMO, is known as the:
Z-tranche
A Treasury bond with a par value of $1,000 has a quote of 95.15. The dollar value of this T-bond is:
$954.68 U.S. government Treasury notes and Treasury bonds are quoted on a percentage of par plus a fraction basis. The fraction used to quote T-notes and T-bonds is 1/32 of a point. To determine the dollar value, first convert the fraction 15/32 to a decimal. If 15 is divided by 32, the result is .46875. Now the quote becomes 95.46875% of par. A T-bond with a quote of 95.46875% of $1,000 is equal to $954.68.
Which of the following bonds has the most interest-rate risk?
A 30-year Treasury STRIP
If interest rates increase, which of the following securities has the LARGEST price change?
A Treasury bond trading at a discount
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT:
All are government guaranteed
Which of the following statements is NOT a feature of GNMA pass-through certificates?
Interest is subject to federal tax but is exempt from state tax
Which of the following statements is TRUE concerning the tax treatment of CMOs?
The interest is fully taxable
Which of the following is NOT TRUE of private label CMOs?
They are subject to less credit risk than agency CMOs
Which of the following securities is exempt from state taxes?
Treasury notes