Answer-first summary for fast verification
Answer: c) CMO issues classes with different risk/return/cash-flow properties
A **CMO** is structured by **tranching** the cash flows from the mortgage collateral into separate classes, each with different **risk, return, and cash-flow characteristics**. A plain-vanilla pass-through MBS simply passes principal and interest through to investors pro rata, while a CMO redistributes those cash flows among tranches. Therefore, the key difference is that a CMO issues classes with different risk/return/cash-flow properties.
Author: Manit Arora
Ultimate access to all questions.
A
a) The nature and type of collateral in a CMO is more varied
B
b) The pass-through MBS can shield some investors from prepayment risk
C
c) CMO issues classes with different risk/return/cash-flow properties
D
d) An MBS is backed by an agency (Fannie Mae, Freddie Mac, Ginnie Mae)
No comments yet.