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Fixed Income

Which of the following is most likely an advantage of collateralized mortgage obligations (CMOs)? CMOs can

  1. eliminate prepayment risk.

  2. be created directly from a pool of mortgage loans.

  3. meet the asset/liability requirements of institutional investors.

C is correct. 

Using CMOs, securities can be created to closely satisfy the asset/liability needs of institutional investors. The creation of a CMO cannot eliminate prepayment risk; it can only distribute the various forms of this risk among various classes of bondholders. The collateral of CMOs are mortgage-related products, not the mortgages themselves.
 

CMO is created from a pool of mortgage loans by MBS. I thought the ans was B. Can anyone explain why not B

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Had it been a Mortgage pass through security, the option ‘B’ is correct.

Where’d you get the question?

Advantages compared to what?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

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Advantages compared to what?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/