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Bonds 203: Collateralized Mortgage Obligations

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1.
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.
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.
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.
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.
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.