Tranches

Question 1

Support tranche

Answer 1

Provided prepayment protection to PAC tranches

Question 2

PAC Tranches (planned amortization)

Answer 2

Protects investors against both prepayment and extension risk

Question 3

Targeted amortization class (TAC’s)

Answer 3

Protects investors against prepayment risk but not extension risk

Question 4

Plain vanilla CMO tranche

Answer 4

Pays interest on all tranches simultaneously but only pays principal to one tranche at a time

Question 5

CMO

Answer 5

Uninsured classes or CMO’s each consisting of different credit qualities, maturities, and exposures to prepayments

Question 6

When comparing agency to private CMO’s, which have higher credit quality and lower yields

Answer 6

Agency private CMO’s

Question 7

When comparing agency CMO’s, what has a greater credit risk

Answer 7

Private label CMO’s

Question 8

Interest only CMO’s increase in value when

Answer 8

Interest rates rise and prepayments fall- this will extend the number of interest payments

Question 9

Principal only CMO’s will increase in value when interest rates

Answer 9

Fall and prepayments accelerate