Test your knowledge

Choose wisely. There is only one correct answer to each question.

Keep studying!

Review your answers below to learn more.

Collateralized mortgage obligations are issued by Ginnie Mae.

Choose wisely. There is only one correct answer.

True

False

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

Companion bonds are safest when interest rates rise.

Choose wisely. There is only one correct answer.

True

False

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

Collateralized mortgage obligations divide mortgages into tranches based on _______.

Choose wisely. There is only one correct answer.

The repayment schedule

Interest rates

Default risk

Maturity date

The repayment schedule. Tranches are based on when the mortgages are scheduled to be repaid.

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

Choose wisely. There is only one correct answer.

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.

__________ feature lower prepayment risk and offer lower returns.

Choose wisely. There is only one correct answer.

CMOs

PACs

Companion bonds

PACs. These bonds feature sinking funds that lower the risk that prepayments will affect returns and pay lower interest as a result.

© Copyright 2024 Morningstar, Inc. All rights reserved. Morningstar, the Morningstar logo, Morningstar.com, Morningstar Tools are either trademark or service marks of Morningstar, Inc. In addition, we encourage you to read this important disclosure.