Questions and Answers
Which of the following is not a type of CMO tranche?
All of the following can be associated with asset-backed securities except?
Which of the following risk factors would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers?
If one were investing in CMOs, that would be done by buying?
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Hedge funds do not register with the SEC under the Investment Company Act of 1940. As such, hedge funds?
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All of the following statements regarding planned amortization class (PAC) collateralized mortgage obligations are true except?
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Pooling assets such as auto loans and mortgages into investment vehicles for sale to the public is the process known as?
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Which of the following is not included in the definition of an investment company under the Investment Company Act of 1940?
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You have a high net worth client who is interested in investing in a hedge fund. Details of the offering would be found in the fund's?
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Investors in collateralized mortgage obligations (CMOs) tend to choose a tranche meeting their maturity expectations. Should the debt continue past the expected payoff date, it is an example of?
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If interest rates fall, which of the following statements regarding collateralized mortgage obligations are true?
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Why do hedge funds tend to limit participation to a maximum of 100 investors?
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All of the following statements regarding the tax treatment interest received from a collateralized mortgage obligation (CMO) investment is true except?
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An investor wants to invest $20,000 but anticipates needing those funds in five years for a business investment. Which of the following securities would be the least suitable for this investor?
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Study Notes
Collateralized Mortgage Obligations (CMOs)
- CMO tranches include PAC (Planned Amortization Class), TAC (Targeted Amortization Class), and Z (Zero tranche). PSA refers to the Public Securities Association and is used for prepayment projections, not a tranche type.
- PACs typically offer lower yields than TACs due to lower prepayment risk and more certain maturity dates, supported by two companion tranches to manage risks.
Asset-Backed Securities
- Asset-backed securities involve pooling individual loans (such as auto loans and mortgages) into larger financial instruments, facilitating easier sales. This process is known as securitization.
- These securities are backed by expected cash flows from the underlying assets but do not guarantee minimal risk.
Hedge Funds
- Hedge funds are not registered with the SEC, leading to less transparency compared to registered investment companies. Most hedge fund transactions are in solicited sales and limited to accredited investors.
- Limiting participant numbers to 100 avoids SEC registration requirements, ensuring fund managers retain flexibility.
Risks Associated with Investments
- Investing in CMOs involves various risks: extension risk arises when repayment continues beyond expected dates; prepayment risk occurs from early payoffs; and interest rate fluctuations impact CMO performance.
- Publicly traded mortgage-backed securities are not generally considered illiquid, but they do carry default risk and interest rate risks affecting repayment timings.
Tax Treatment
- Interest received from CMOs is fully taxable at the federal, state, and local levels, similar to corporate bond interest. U.S. Treasury and municipal bonds have specific tax exemptions.
Investment Suitability
- When considering short-term investment needs, zero-tranche CMOs are the least suitable due to their exposure to interest rate and extension risks. Options like a zero-coupon bond with a maturity close to the investment timeline are more appropriate.
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Description
Explore the concepts of Collateralized Mortgage Obligations (CMOs), asset-backed securities, and hedge funds. This quiz covers crucial aspects like CMO tranches, securitization processes, and the regulatory landscape of hedge funds. Test your understanding and solidify your knowledge in these complex financial instruments.