Financial Risk Manager Part 1

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Explanation:

Correct answer: D

A is true: A CMO differs from a pass-through MBS because it redistributes the mortgage cash flows into tranches with different timing and risk characteristics.
B is true: For the same mortgage collateral, the aggregate value of the tranches should equal the MBS value, and the weighted-average duration of the tranches should be consistent with the pool’s duration.
C is true: In a sequential structure, the last tranche to receive principal has the longest average life and therefore the highest duration / greatest interest rate risk.
D is false: Increasing the PSA assumption means faster prepayments, which generally reduces tranche durations, not increases them.

So the exception is D.

Explanation:

Correct answer: D

A is true: A CMO differs from a pass-through MBS because it redistributes the mortgage cash flows into tranches with different timing and risk characteristics.
B is true: For the same mortgage collateral, the aggregate value of the tranches should equal the MBS value, and the weighted-average duration of the tranches should be consistent with the pool’s duration.
C is true: In a sequential structure, the last tranche to receive principal has the longest average life and therefore the highest duration / greatest interest rate risk.
D is false: Increasing the PSA assumption means faster prepayments, which generally reduces tranche durations, not increases them.

So the exception is D.

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Q-106.1. Each of the following is true about collateralized mortgage obligations (CMOs) EXCEPT:

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MManit

Last updated: April 18, 2026 at 11:32

The primary difference between a CMO and an pass-through MBS is that a CMO structures the cash flows into tranches with various risk/return profiles

50.0%

For a given mortgage pool, the value and duration of the MBS should equal, respectively, the sum of the tranche values and weighted average duration of the CMO

50.0%

In a sequential CMO with four tranches, if Tranche D receives principal only after the other three Tranches are fully repaid, Tranche D offers greater interest rate risk (i.e., has the highest duration)

If we increase the PSA prepayment assumption (e.g., 100% PSA to 200% PSA), the duration of each Tranche in a CMO will increase