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Bonds 203: Collateralized Mortgage Obligations

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1.
__________ feature lower prepayment risk and offer lower returns.
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PACs. These bonds feature sinking funds that lower the risk that prepayments will affect returns and pay lower interest as a result.
2.
Collateralized mortgage obligations are issued by Ginnie Mae.
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False. CMOs are issued by the Federal Home Loan Corporation (FHLMC), or Freddie Mac.
3.
Compared to other pass-throughs, collateralized mortgage obligations offer higher returns and lower risk.
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False. While CMOs do offer lower prepayment risk than other pass-throughs, their returns are often lower as a result.
4.
Which of the following is an investment benefit of collateralized mortgage obligations?
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Higher potential than that of US Treasury bonds. The other features are not characteristic of CMO bonds.
5.
_________ pay higher returns for accepting higher prepayment risk.
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Companion bonds. Since these are paid off first when underlying mortgages are prepaid, they absorb more prepayment risk and typically pay higher interest rates.