Series 7 practice questionmediumMortgage-Backed Securities — Pass-Through
A GNMA pass-through security provides investors with:
- AOnly interest payments, with principal returned at maturity
- BMonthly payments of both interest and principal, including any prepayments from the underlying mortgage pool✓ Correct answer
- CQuarterly dividend payments like preferred stock
- DSemi-annual coupon payments like Treasury bonds
Explanation
Why B — Monthly payments of both interest and principal, including any prepayments from the underlying mortgage pool
GNMA pass-through securities pass the monthly mortgage payments (including both interest and principal, as well as any prepayments) directly to investors, minus a servicing fee. Unlike bonds that pay semi-annual interest and return principal at maturity, pass-through holders receive monthly cash flows that include a return of principal, which means the investment amount decreases over time as mortgages are paid down.
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