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Companion bonds are safest when interest rates rise.

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True

False

True. Since more mortgages are prepaid when interest rates fall, rising interest rates reduce the prepayment risk of companion bonds.

_________ pay higher returns for accepting higher prepayment risk.

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CMOs

PACs

Companion bonds

Companion bonds. Since these are paid off first when underlying mortgages are prepaid, they absorb more prepayment risk and typically pay higher interest rates.

Which of the following is an investment benefit of collateralized mortgage obligations?

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Low tax rates

Higher yields than those of other pass-throughs

Inflation protection

Higher potential than that of US Treasury bonds

Higher potential than that of US Treasury bonds. The other features are not characteristic of CMO bonds.

Income from a CMO mortgage pool is applied to the latest-maturing bonds first.

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True

False

False. Income from a CMO mortgage pool is applied to the earliest-maturing bonds first.

Collateralized mortgage obligations are issued by Ginnie Mae.

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True

False

False. CMOs are issued by the Federal Home Loan Corporation (FHLMC), or Freddie Mac.

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