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A Collateralized mortgage obligation (CMO) has: A. no prepayment risk. B. no default risk. C. no...

A Collateralized mortgage obligation (CMO) has:

A. no prepayment risk.

B. no default risk.

C. no default, no prepayment and no interest rate risks.

D. no interest rate risk.

E. high degree of interest rate risk.

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Answer #1

ANSWER

CORRECT OPTION : Option (E) : high degree of interest rate risk

EXPLANATION :

  • Collateralized mortgage obligation are basically securities that are secured by mortgages. Such securities are divided into different categories on the basis of different maturities and such different categories carries different interest rates.
  • Such securities and return on such securities are affected by the changes in the Interest rates hence it carries high degree of interest rate risk.Any rise in the interest rates in the market makes the price of CMO fall as the market offers better interest rates than such securities so investors wants to invest into higher yielding investments and vice-versa.
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