SIE practice questionmediumCMOs
An investor selects a planned amortization class (PAC) tranche in a CMO primarily to:
- AAvoid all credit risk
- BMaximize prepayment risk
- CObtain more predictable cash flows✓ Correct answer
- DEarn tax-free interest
Explanation
Why C — Obtain more predictable cash flows
PACs offer predictable cash flow by reducing prepayment and extension risk. They do not eliminate credit risk or guarantee tax-free interest.
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