Products & Their RisksQuestion 131 of 398
A collateralized mortgage obligation (CMO) is:
a.A single municipal bond backed by real estate taxes
b.A Treasury security that pays a fixed coupon
c.A share of common stock in a mortgage bank
d.A security backed by a pool of mortgages and divided into tranches with different maturities and risk levels
Explanation
A CMO takes a pool of mortgages (or mortgage-backed securities) and redistributes the principal and interest into separate classes called tranches. Each tranche has a different expected maturity and exposure to prepayment risk, letting investors choose the cash-flow profile that fits their needs. CMOs are backed by mortgages, not by the direct full faith and credit of the U.S. government.
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- U.S. Treasury bills (T-bills) are:
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