Products & RisksPregunta 53 de 125
A collateralized mortgage obligation (CMO) is structured into tranches primarily to:
a.Redistribute prepayment and maturity risk among classes with different priorities
b.Guarantee investors will never lose principal
c.Eliminate all interest rate risk
d.Convert debt into equity
Explicación
A CMO divides the cash flows from a pool of mortgages into tranches that receive principal in a set order, redistributing prepayment and average-life risk. Earlier tranches receive principal first and have shorter, more predictable lives, while later tranches bear more extension or prepayment uncertainty.
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