SOA Exam 6

Section A


by Cynic

  1. What’s the difference between floating-rate, extendible-reset, and variable-rate securities? (HBFIS – Pages 7-8)

  2. What are the advantages/disadvantages of a bond call provision to the issuer? to the investor? (HBFIS – Pages 10-12)

  3. What’s the difference between a noncallable and a nonrefundable bond? (HBFIS – Pages 10-11)

  4. What are zero-coupon treasury securities? (HBFIS – Pages 186-187)

  5. What are the factors that affect a floater’s price? (HBFIS – Page 331)

  6. What’s the difference between ARM (Adjustable-Rate Mortgage) and “Two-Step” Mortgage? (HBFIS – Pages 556-559)

  7. What’s the difference between Graduate Payment Mortgage, Growing Equity Mortgage, and Tiered-Payment Mortgage? (HBFIS – Pages 559-560)

  8. Describe the PSA (Public Securities Association) prepayment model. (HBFIS – Page 583)

  9. What is the OAS (Option-Adjusted Spread) model? (HBFIS – Pages 599-600)

  10. Describe each of the following CMO types: (HBFIS – Pages 624-636)
    1. Sequential-pay: reallocate principal payments sequentially to different classes (or tranches)
    2. PAC (Plan Amortization Class): PAC schedule is determined by PAC bands; cash flow uncertainty is redirected to companions
    3. TAC (Target Amortization Class): like PACs, but don’t provide downward protection against WAL (Weighted Average Life) extension
    4. Companion: support class; influenced by the class it supports
    5. Z-bond: a CMO class with a period of principal and interest lockout; get credit for the forgone interest payments through the increase in principal known as accretion; have no reinvestment risk and high yield
    6. AD (Accretion-Directed): derive all cash flows from the interest accretions of a Z class
    7. Floater and inverse: created from any coupon-bearing class above; inverses usually have higher yields than floaters
    8. IO and PO (Interest Only and Principal Only strips): IOs are bearish with negative duration (price increases as interest rate increases); POs are bullish with long positive duration

  11. Describe the 3 approaches in evaluating CMOs. (HBFIS – Pages 643-646)

  12. What are the characteristics of a convertible bond? (HBFIS – Pages 1104-1106)

  13. What are the advantages/disadvantages of a convertible to the issuer? to the investor? (HBFIS – Pages 1106-1110)

  14. What are the important GIC (Guaranteed Insurance Contract) characteristics in portfolio construction? (SN 6-23-00)

  15. What are embedded options in GIC and in mortgage?

  16. What are the advantages/disadvantages of a sinking fund provision to the investor? (HBFIS – Pages 12-13)

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