SIE practice questionmediumCMOs
What is the main objective of creating tranches within a Collateralized Mortgage Obligation (CMO)?
- ATo increase the credit risk
- BTo target different maturity preferences for investors✓ Correct answer
- CTo guarantee returns
- DTo eliminate prepayment risk
Explanation
Why B — To target different maturity preferences for investors
Tranches in CMOs segment cash flows, offering different maturities and risk levels for investors. CMOs do not guarantee returns or eliminate prepayment risk, and tranching does not increase credit risk.
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