SIE practice questionmediumCMOs
CMOs are structured with tranches to:
- ACreate short-term only investment options
- BGuarantee principal protection to all tranches
- CEliminate all interest rate risk
- DDistribute prepayment and extension risk among investors✓ Correct answer
Explanation
Why D — Distribute prepayment and extension risk among investors
CMO tranches allocate different levels of prepayment and extension risk. Not all tranches guarantee principal, and interest rate risk remains.
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