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1.
Collateralized mortgage obligations divide mortgages into tranches based on _______.
The repayment schedule. Tranches are based on when the mortgages are scheduled to be repaid.
2.
Which of the following is an investment benefit of collateralized mortgage obligations?
Higher potential than that of US Treasury bonds. The other features are not characteristic of CMO bonds.
3.
Companion bonds are safest when interest rates rise.
True. Since more mortgages are prepaid when interest rates fall, rising interest rates reduce the prepayment risk of companion bonds.
4.
_________ pay higher returns for accepting higher prepayment risk.
Companion bonds. Since these are paid off first when underlying mortgages are prepaid, they absorb more prepayment risk and typically pay higher interest rates.
5.
__________ feature lower prepayment risk and offer lower returns.
PACs. These bonds feature sinking funds that lower the risk that prepayments will affect returns and pay lower interest as a result.
