SIE practice questionhardCMOs
A support (companion) tranche in a CMO is MOST exposed to:
- APrepayment risk✓ Correct answer
- BInterest rate risk
- CCredit risk
- DInflation risk
Explanation
Why A — Prepayment risk
Support tranches absorb excess prepayments, making them most exposed to prepayment risk. All bonds have some interest rate/inflation risk, but structure increases prepayment exposure.
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