Unit 12-Other Securities Products

principal payments are made in ___ increments to randomly selected bonds within a tranche

1000

Typical fee structure for a hedge fund:

2 and 20 2% management fee and 20% of the any profits

A structured instrument known as an asset-backed security would not be backed by A)loans on marginable securities. B)auto loans. C)credit card debt. D)student loans.

A

Which of the following is not a characteristic of hedge funds? A)They offer managers high fixed fees. B)They invest in private securities, real assets, derivatives, and structured products. C)They are privately organized and generally unregistered. D)They use leverage, short positions, and concentrated positions.

A

their value and income payments are derived from or backed by a specefic pool of underlying assets

ABS

If interest rates fall, which of the following statements regarding collateralized mortgage obligations are true? Prepayment risk will increase. Prepayment risk will decrease. Prices of each tranche will rise. Prices of each tranche will fall. A)II and III B)I and III C)II and IV D)I and IV

B

Which of the following accounts would a CMO Z-tranche be best suited for? A)A custodial account set up under the Uniform Transfer to Minors Act (UTMA) B)A professionally managed hedge fund specializing in real estate portfolio securities C)An IRA account for a middle-aged client who is willing to defer the income D)A joint account where the owners are looking to diversify and lower their risk

B

Which of the following statements regarding hedge funds is correct? A)Hedge funds are passively managed in an attempt to provide predictable returns for investors. B)Hedge funds are usually structured as a partnership. C)Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. D)Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they gain investment savvy.

B

complex ABS. Do not specialize in any single type of debt. Their portfolios consist or non mortgage loans or bonds like leases, credit card debt, company's receivables, or derivative products

CDOs

pool a large number of mortgages, usually on single family residences. Issued by private sector financing corporations and are often backed by Ginnie Mae, Fannie Mae, and Freddie Mac historically higher rated

CMOs

Compared to U.S. government agency-backed CMOs, CDOs have A)greater liquidity. B)generally more secure collateral. C)less credit risk. D)less prepayment risk.

D

Can be used to hedge against interest rate risk

IOs

byproducts of POs. POS receive the principal stream from underlying mortgages, IOs receive the interest. IOs also sell at discount., and its cash flow declines over time, just as the proportion of interest in a mortgage payment declines over time. IOs increase in value when interest rates rise and decline in value when interest rates fall

IOs

Unsuitable for small or unsophisticated investors bc of their complexity and risks

PACs

have the least prepayment and extension risk

PACs

have targeted maturity dates they are retired first and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) bc changes in prepayments are transferred to companion tranches, called support tranches

Planned Amortization Class CMOs (PACs)

protected agains prepayment risk but not extension risk

TACs

structure transfers prepayment risk only to a companion tranche does not offer protection from extension risk. These investors accept the extension risk and the resulting greater price risk in exchange for a slightly higher interest rate.

Targeted Amortization Class CMOs (TACs)

CMOs are not backed by the ____, they are corporate instruements

US gov

would not be suitable for an investor needing funds in a specefied amount of time, bc of the unpredictable nature of when payment will be received

Z tranche CMOs

All of the following concerning collateralized mortgage obligations (CMOs) are true except A)z-tranche CMOs carry the lowest prepayment risk. B)CMOs can be purchased and sold over-the-counter (OTC). C)CMOs are not backed by the federal government. D)most CMOs are backed by government agency pass-through securities held in a trust account

a The z-tranche is last in line when it comes to payouts. If prepayments occur at a rate faster than expected, this tranche suffers disproportionately more than the others.

one in which regular payments are made against the principal. This results in an investor's return consisting of principal along with interest. At the end of the term, the principal has been repaid Ex: mortgage

amortizing ABS

sometimes known as special purpose acqusition companies (SPACs) carry their own unique risks. they are companies without business operations that raise money through IPOs in order to have their shares publicly traded for the sole purpose of seeking out a business or combination of businesses

blank check hedge funds

issuers raise capitals by selling securities to the public without telling investors what the specefic use of the proceeds will be. , but might target a particular industry or sector

blind pool hedge funds

A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A)tax free. B)treated partly as ordinary income and partly as a tax-free return of principal. C)taxed as ordinary income. D)taxed as a capital gain if the underlying mortgage is prepaid.

c

Common theme among all ABS is the

contractual obligation to pay the debt

POs sell at a ____ to par

discount

mutual funds available to all investors that invest primarily in unregistered hedge funds gives non accredited investor access to hedge funds.

funds of hedge funds

form of a fund generally organized as a limited partnership with no more than 100 investors. This keep the funds from having to register with the SEC.

hedge funds

Most common strategies used by hedge funds:

highly leveraged portfolios short positions derivatives (options and futures) currency speculation commodity speculation investing in politically unstable international markets

CMOs are subject to

interest rate risk

one of the differences between mutual funds and hedge funds

lack of transparency (bc they dont have to register w the SEC)

requirement in a hedge fund that they must maintain the investment for a minimum amount of time

lock up provision

Bc of lower risk, PACs have ____ yields than TACs

lower

one backed by debt obligations without a fixed ending date. Ex: credit card CDO

nonamortizing CDO

principal is only paid to ___ at a time

one tranche

CMO pays principal and interest monthly, but only repays principal to

one tranche at a time

POs are affected by fluctuations in ___ rates

prepayment

Common CMOs

principal only interest only planned amoritization class targeted amortization class

the flow of income from underlying mortgages is divided into principal and interest streams and direct to the POs and IOs respectively. the income stream comes from principal payments on the underlying mortgages-both scheduled principal payments and prepayments. So entire FV is repayed

principal only CMOs (POs)

name of the hedge funds prospectus that generally contains less information

private placement memorandum

Risk of CMOs

rate of principal repayment varies prepayment risk extension risk (if interest rates rise they will have to hold investment longer than usual)

Before buying any CMO, the customer must sign a

suitability statement

pool of mortgages is structured into maturity classes called

tranches

CMOs yeild more than

treasury securities

Interest from CMOs is subject to

triple taxation

receives no payment until all preceding CMO tranches are retired. Most volatile CMO tranches

zero tranche CMO (Z tranche)