CFA Level I · CFA Level I Exam · Fixed-Income Securitization
Compared with a sequential-pay CMO's first tranche, a CMO's last tranche is most likely to offer investors:
The last tranche most likely offers a longer average life and typically a higher yield. It receives principal only after earlier tranches are retired, so it has greater interest rate and extension exposure, and investors generally demand higher yield for the longer maturity.
- Aa shorter average life and lower yield
- Ba longer average life and typically higher yieldCorrect
- Cthe same average life and the same yield
Explanation
The last tranche is paid after earlier tranches retire, so its average life is longer. Under a normal upward-sloping yield curve, longer maturities usually offer higher yields as compensation.
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