Series 7 practice questionhardCMOs — Scenario — Investor Suitability
A conservative investor seeking predictable monthly income for the next 5 years should consider which CMO tranche?
- ACompanion tranche for its higher yield
- BZ-tranche for its high accrued interest
- CPAC tranche with an expected average life matching the 5-year horizon✓ Correct answer
- DInterest-only (IO) strip
Explanation
Why C — PAC tranche with an expected average life matching the 5-year horizon
A PAC (Planned Amortization Class) tranche with an expected average life of approximately 5 years would be most suitable for a conservative investor seeking predictable income. PAC tranches have the most predictable cash flows because companion tranches absorb prepayment variability. Z-tranches pay no current income, companion tranches have highly volatile cash flows, and IO strips decrease in value when prepayments increase.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 755+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Investment Information & Recommendations questions
- Which of the following is a form of internal credit enhancement used in asset-backed securities?
- Which statement BEST distinguishes the federal funds rate from the discount rate?
- An investor holds a GNMA pass-through security yielding 5.5%. Market interest rates drop to 3.5%. The investor faces…
- A corporation issues $10 million in commercial paper at a discount with a 90-day maturity. The paper is sold at 98.5%…