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Bonds 203: Collateralized Mortgage Obligations

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1.
Collateralized mortgage obligations divide mortgages into tranches based on _______.
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The repayment schedule. Tranches are based on when the mortgages are scheduled to be repaid.
2.
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.
3.
Companion bonds are safest when interest rates rise.
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True. Since more mortgages are prepaid when interest rates fall, rising interest rates reduce the prepayment risk of companion bonds.
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.
Which is not an investment benefit of collateralized mortgage obligations?
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Low tax rates. Low tax rates are not a benefit of CMOs, the returns of which are taxed as regular income.