University:
CFA Institute
Course:
CFA Level 2 - Fixed Income
Academic year:

2023
Views:

10

Pages:

2
Author:

anon

CFA Level 2 - Fixed Income Session 15-Reading 57 Mortgage-Backed Sector of the Bond Market-LOS i (Notes, Practice Questions, Sample Questions) 1. Which of the following statements regarding collateralized mortgage obligations (CMOs) is least accurate: A) CMOs perfectly protect investors against contraction risk but do not protect against extension risk. [Explanation: CMOs do not perfectly protect investors against contraction risk. They offer some protection against both contraction and extension risks, but not perfect protection against either] B) The Z-tranche or accrual tranche does not receive current interest until the other tranches have been paid off. C) CMOs are securities issued against passthrough securities for which the cash flows have been reallocated to different bond classes called tranches 2. Which of the following explains why the companion tranches have the greatest prepayment risk in a CMO structure? The companion tranches: A) are more interest rate sensitive and therefore prepayment risk is higher. B) have to support any principal payments in excess of the scheduled principal payments. [Explanation: There is an inverse relationship between the prepayment risk of PAC tranches and the prepayment risk associated with the support tranches. In other words, the certainty of PAC bond cash flow comes at the expense of increased risk to the support tranches] C) consist of underlying mortgages for which prepayment is allowed, as opposed to the PAC tranches 3. Which of the following is least accurate regarding planned amortization class (PAC) versus support tranches? A) The PAC tranches have the greatest prepayment risk in the collateralized mortgage obligation (CMO) structure. [Explanation: The support tranches have the greatest prepayment risk in the CMO structure, not the PAC tranches] B) The prepayment risk protection provided by the support tranches causes the average life to extend and contract. C) There is an inverse relationship between the prepayment risk of the PAC tranches and the prepayment risk associated with the support tranches