SIE practice questionhardCMOs
Which tranche in a CMO structure is MOST subject to prepayment risk?
- AThe planned amortization class (PAC) tranche
- BThe shortest maturity (fast-pay) tranche✓ Correct answer
- CThe support (companion) tranche
- DThe longest maturity (last-pay) tranche
Explanation
Why B — The shortest maturity (fast-pay) tranche
Short, fast-pay tranches receive principal first and thus face high prepayment risk. PAC tranches are designed to be more stable; companion and last-pay are exposed to extension risk.
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