SIE practice questionmediumCMOs
Which risk is most associated with Collateralized Mortgage Obligations (CMOs)?
- AInflation risk
- BCredit risk
- CPrepayment risk✓ Correct answer
- DLiquidity risk
Explanation
Why C — Prepayment risk
CMOs are most subject to prepayment risk, which occurs when borrowers pay off their mortgages early, affecting cash flows. Credit risk is low for government-backed CMOs, and while inflation and liquidity risks exist, prepayment is the primary concern.
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