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Bonds 203: Collateralized Mortgage Obligations

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1.
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.
2.
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.
3.
Income from a CMO mortgage pool is applied to the latest-maturing bonds first.
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False. Income from a CMO mortgage pool is applied to the earliest-maturing bonds first.
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.
_________ 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.