Compare a CMO with A, B, Z to a CMO that has the same tranches but is backed by a larger pool of mortgages (and therefore has a residual). In a CMO with aresidual:Tranche A has a shorter duration and less inflation/interest rate riskTranche 8 has a shorter duration and more inflation/interest rate riskTranche B has a longer duration and more inflation/interest rate riskTranche Z has more inflation/interest rate riskTranche Z has less inflation/interest rate risk

A Collateralized Mortgage Obligation (CMO) is a type of complex financial instrument that falls…

Compare a CMO with A, B, Z to a CMO that has the same tranches but is backed by a larger pool of mortgages (and therefore has a residual). In a CMO with a residual: O Tranche A has a shorter duration and less inflationvinterest rate risk O Tranche B has a shorter duration and more inflation/interest rate risk Tranche B has a longer duration and more inflation interest rate risk Tranche 2 has more inflation/interest rate risk Tranche Z has less inflation/interest rate risk

Compare a CMO with A, B, Z to a CMO that has the same tranches but is backed by a larger pool of mortgages (and therefore has a residual). In a CMO with a residual: O Tranche A has a shorter duration and less inflationvinterest rate risk O Tranche B has a shorter duration and more inflation/interest rate risk Tranche B has a longer duration and more inflation interest rate risk Tranche 2 has more inflation/interest rate risk Tranche Z has less inflation/interest rate risk

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Which of the following statement is (are) TRUE of collateralized loan obligation (CLO)? A: A CLO pools a group of loans and creates multiple tranches with different levels of risk B: The less risky tranches in a CLO have a lower pay-off (i.e. lower coupons) C: A tranch of a CLO can have a high credit rating even though the underlying loans in a CLO are risky D: All of the Above Please answer fast i give you upvote.
Which of the following statements regarding fixed-rate loans is true? Group of answer choices a. Fixed-rate loans are preferable if interest rates are expected to rise. b. The cost of fixed-rate loans increases with an increase in the market interest rate. c. The cost of fixed-rate loans decreases with a decrease in the market interest rate. d. Fixed-rate loans are preferable if interest rates are expected to fall. e. Fixed-rate loans have periodic adjustment dates, at which time the interest rate and monthly payment are adjusted as necessary.
Which is true of variable rate loans? A) the rate can only go up B) the interest rate can go up or down, depending upon the index it is tied to C) the interest rate can fall below 0 D) the rate can only go down
Select the correct statement: The value of a premium bond will fall over time, if cost of debt (rd) decreases The value of a discount bond will fall over time, if cost of debt (rd) does not change The value of a discount bond will increase ove time, if cost of debt (rd) does not change The value of a premium bond will increase over time, if cost of debt (rd) does not change
The advantage of a "balloon payment" loan over a conventional loan repayment plan is: A. less total interest is paid B. the size of the payments is flexible C. the payments are smaller, except for the final one D. the interest rate is flexible
The internal rate of return on a mortgage loan calculated from the lender's perspective is more commonly referred to as the: Multiple Choice O discount point. O effective borrowing cost. Olender's yield. Oloan constant.
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This is the rate for a short-term riskless security when inflation is expected to be zero. It is calculated by adding the inflation premium to r*. This is the premium added as a compensation for the risk that an investor will not get paid in full. It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate. Component Liquidity risk premium Maturity risk premium Inflation premium…
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate. It is calculated by adding the inflation premium to r*. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This premium is added when a security lacks marketability,…
Which one of the following statements about the term structure of interest rates is true?a. The expectations hypothesis indicates a flat yield curve if anticipated future short-term rates exceed current short-term rates.b. The expectations hypothesis contends that the long-term rate is equal to the anticipated short-term rate.c. The liquidity premium theory indicates that, all else being equal, longer maturities will have lower yields.d. The liquidity preference theory contends that lenders prefer to buy securities at the short end of the yield curve.
Which of the following most accurately describes the behavior of credit default swaps?a. When credit risk increases, swap premiums increase.b. When credit and interest rate risk increase, swap premiums increase.c. When credit risk increases, swap premiums increase, but when interest rate risk increases, swap premiums decrease.
Typically, short-term interest rates: А. are more volatile than long-term interest rates В. are less volatile than long-term interest rates C. have similar volatility as the long-term interest rates D. None of the above
What is the advantage of a variable-interest loan? Protects the borrower from rising interest rates Borrower can capitalize on a reference rate decrease Makes it easier for the borrower to plan for future payments Reduces the total interest payments Which of the following tools is used to analyze the industry attractiveness in the credit application process? PESTEL analysis Management analysis Ratios analysis SWOT analysis

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