For collateralized mortgage obligations (CMOs) ar
For collateralized mortgage obligations (CMOs), are prepayment risk and interest rate risk, respectively, different for the various tranches of bonds?
Prepayment risk Interest rate risk
A. No No
B. Yes No
C. Yes Yes
参考解答
4j8***102
2024-11-14 21:45:36
Ans:C;
CMOs are structured so as to redistribute prepayment risk and interest risk among the different tranches of bonds using rules for the distribution of interest and principal. For example, if there are three tranches of bonds the distribution rules ensure that the first class of bonds receives all principal until they are paid off. Finally, the last class receives principal payments. Effectively, the first tranche has the shortest maturity/duration while the last tranche has the longest maturity/duration.
Thus prepayment risk and interest rate risk have been redistributed across the bond classes with the first tranche experiencing the greatest prepayment risk the last tranche experiencing the most interest rate risk.
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