Pooling assets such as auto loans and mortgages into investment vehicles for sale to the public
Securitization
How is interest from CMOS taxes?
Federal, state and local levels
- Receives no payment until all preceding CMO tranches are retired
- Most volatile CMO tranche
- Would not be suitable for an investor needing funds in specified amount of time
Zero Tranche CMO (Z-Tranche)
- Transfers prepayment risk only to a companion tranche and does not offer protection from extension risk
- Investors accept the extension risk in exchange for slightly higher interest rate
Targeted Amortization Class CMO (TAC)
- Have targeted maturity dates
- Retired first and offer protection from prepayment and extension risk
Planned Amortization Class CMO (PACS)
- Receives interest
- Sells at a discount from par
- Cash flow declines over time
- Increases when interest rates rise
- Can be used to hedge portfolio against interest rate risk
- Owner does not know how long the stream of interest payments will last
Interest Only CMO (IO)
Income stream comes from principal payments on the underlying mortgages- both scheduled mortgage principal payments and prepayments
Sells at discount from par
Tends to be volatile
Rises when interest rates fall
Principal Only CMO (PO)
One of the classes of securities that forms an issue of collate rises mortgage obligations. Each is characterized by its interest rate, average maturity, risk level and sensitivity to mortgage prepayments. Neither the rate of return nor the maturity date of a CMO is guaranteed.
Repays principal to one at a time
$1,000 increments
Tranche
Backed by debit obligations
Ex: credit card CDO
Non-amortizing Loan
- Regular payments are made against the principal
- Investors return consists of principal along with interest
Ex: Auto Loan
Amortizing Loan
- Does not specialize in any single type of debt
- Portfolios consist of non mortgage loans or bonds (auto loans, credit cards)
- Not very liquid
Collateralized Debt Obligations (CDO)
A mortgage backed corporate security. Unlike pass through obligations issued by FINRA and GNMA, it’s yield is not guaranteed and it does not have the federal governments backing. These issues attempt to return interest and principal at a predetermined rate
Collateralized Mortgage Obligation (CMO)
Issuers raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be but might target a particular industry or sector
Blind Pool Companies
Companies without business operations that raise money through IPOs in order to have their share publicly traded for the sole purpose of seeking out a business or combination of businesses
Does not identify any proposed investment intent
Blank Check Companies
How are management fees structured for hedge funds?
Most funds take a 2% management fee and 20% of any profits
Provides that during a certain initial period, an investor may not make a withdrawal from a hedge fund. Length of time will vary.
Lock-up period
- A form of fund generally organized as a limited partnership with no more than 100 investors.
- Does. Or have to register with the SEC
- Investments are pooled and professionally managed (aggressively)
- Unregulated
- Suitable for sophisticated investors
- Speculative
- Illiquid
Hedge Funds
