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136 - Investment Planning 16 Asset-backed securities A An asset-backed security represents a pool of asset-linked debts B Investors receive payments on a monthly basis, consisting of scheduled principal and interest, and any unscheduled payments consisting of prepayments C Unlike prepayments for mortgage-backed securities, prepayments for asset-backed securities are almost unaffected by changes in market interest rates, resulting in relatively predictable cash ows D All asset-backed securities have one or more credit enhancements that result in a higher credit rating They offer investors higher yield than corporate bonds of similar quality and maturity E The market for asset-backed securities is very liquid 17 Mortgage pass-through securities A A mortgage pass-through security represents a self-amortizing pool of mortgages B Payments are made on a monthly basis and consist of scheduled principal and interest, as well as any unscheduled payments consisting of prepayments and defaults The timing and amount of cash ows are largely dependent on prepayments Payments vary from month to month, and the amount received by the investor also varies each month C If no prepayments are made, the monthly cash ows will remain constant It is only the composition of the cash ows between interest, principal, and servicing fees that changes when a loan amortizes D Mortgage pass-through securities should be evaluated by xed-income investors because they provide many bene ts (1) Their yields can be as much as 200 basis points higher than comparable government and corporate xed-income debt (2) They are considered to be of higher credit quality than AAA corporate bonds, because mortgage pass-through securities are issued by federal agencies (3) These securities prove to be very liquid in the marketplace They are more liquid than corporate bonds and as liquid as Treasuries (4) They are a very good source for an investor interested in receiving a monthly income E Mortgage pass-through securities also carry a degree of risk (1) Interest rate risk (2) Reinvestment rate risk F The uncertainty in the monthly payments affects the valuation of a mortgage pass-through security If mortgages are paid off sooner than expected, the realized return will be higher than the expected return The opposite is also true: If mortgages are paid off later than expected, the realized return will be smaller than the expected return 18 Collateralized mortgage obligations (CMOs) A A collateralized mortgage obligation is a derivative of a pass-through security held by a trust in which prepayment and reinvestment risk is reduced B The CMO is subdivided into different classes (called tranches), which receive different cash ow payments The principal repayment is directed to the rst tranche until it is retired and then paid to the next tranche Principal repayments are not made to the next tranche until the prior tranche is retired Interest is paid off annually on the amount of the loan in each tranche.



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There already exist several specifications and Java APIs for parsing XML Arguably, the two most important XML parsing technologies are the Document Object Model and the Simple API for XML Parsing (SAX) Both are programmatic ways to access XML documents they differ primarily in that the former is a standard pushed by the W3C and the latter has become (implicitly) the de facto standard interface for event-driven parsing, evolving from a collective effort by participants of the XML-DEV W3C mailing list DOM The Document Object Model (DOM) is a W3C-coordinated effort to define a set of platform- and language-neutral programmatic interfaces to document data In W3C lingo, a "document" is a very general concept; HTML and XML documents are considered subclasses The DOM Working Group of the W3C publishes DOM specifications in terms of levels There are currently three levels of specifications: DOM Levels 1, 2, and 3 DOM Level 2 is the current specification, and DOM Level 3 is under development More comprehensive information about the status of W3C work on DOM can be found at http://wwww3org/DOM/Activityhtml





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Topic 40: Types and Use of Investment Vehicles - 137 C By accepting a later repayment of principal, investors in the longer tranches accept a higher interest rate than investors in the early tranches D With a mortgage pass-through security, prepayments are spread over the entire life of the security In the case of a CMO, prepayments are spread over each tranche The timing of principal repayment becomes slightly more known than that of a mortgage pass-through security For example, an investor in need of cash is better served by purchasing the rst tranche, whereas an investor in little need of cash is better off acquiring a later tranche Natural resources investments in timber, oil, and the like They have an elastic demand, which means they are price sensitive to demand Increases in demand cause their value to rise, and vice versa Tangible assets Tangible assets include collectibles, such as Beanie Babies, baseball cards, coins, stamps, and the like A strong secondary marketplace and government regulation do not exist for these assets Liquidity risk and fraud can run high American depository receipts (ADRs) A Foreign rms can have their shares traded on US exchanges (1) One way is to have their shares directly available for trading by listing them on exchanges These shares are traded exactly like those of a US company (2) The other way is by issuing American depository receipts (ADRs) B ADRs represent indirect ownership in shares of a foreign company ADRs are tradable receipts issued by US banks that have possession of physical shares held on deposit by correspondent banks in the home country of the company whose shares are issued The correspondent bank holding the shares receives the dividends and converts them into US dollars after paying all foreign withholding taxes C ADRs are an effective means of investing in foreign companies without having to worry about currency risk Security risk diagram A Risk (and return potential) increases from bottom to top B Risk (and return potential) increases from left to right C FDIC-insured CDs are less risky D Futures and commodities are most risky.

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