A fixed income portfolio manager is evaluating inv
A fixed income portfolio manager is evaluating investments in the mortgage
market but is concerned about prepayment risk. The security that willmost likely
minimize prepayment risk is:
A. a mortgage passthrough security.
B. a portfolio of interest-only mortgage loans.
C. tranche B of a collateralized mortgage obligation.
参考解答
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2024-11-14 19:55:41
Ans:C;
C is correct because a collateralized mortgage obligation or CMO, is structured to distribute
prepayment risk among different tranches of bonds. Tranche A would be
repaid first, followed by tranche B, then C, etc.
A is not correct. A mortgage passthrough security passes the payments made on a pool of mortgogages through proportionally to each security holder. A holder of a mortgage passthrough security that owns a 1% portion of the issue will receive 1% share of all the monthly cash flows from all the mortgages. Since each holder receives a percentage of all cash flows, a mortgage passthrough security has prepayment risk as a single mortgage would.
B is not correct. A holder of a portfolio of interest-only mortgage loans will receive less total payments when prepayment rates are higher since interest is only paid on the outstanding principal amount, which is decreased by prepayments. It does not minimize prepayment risk.
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