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Bonds 203: Collateralized Mortgage Obligations

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1.
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.
2.
_________ 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.
3.
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.
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.
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.