CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features
In a sequential-pay collateralized mortgage obligation (CMO), principal payments from the underlying mortgage pool are most likely distributed to:
Principal in a sequential-pay CMO goes entirely to the first tranche until it is fully retired, then to the next tranche in order. Tranches are not paid pro rata, and the longest tranche is paid last, which creates the differing maturities.
- Aall tranches pro rata based on outstanding balances.
- Bthe first tranche until it is retired, then to the next tranche.Correct
- Cthe last tranche first, since it carries the longest maturity.
Explanation
In a sequential-pay CMO, all principal (scheduled and prepaid) goes to the first tranche until its balance is zero, then to the second, and so on. Pro rata distribution is not how sequential tranches work. Paying the longest tranche first would reverse the structure.
Did you get it right without looking?
One question tells you little. A timed set on Mortgage-Backed Security (MBS) Instrument and Market Features shows your real accuracy, how long you take and where you lose marks.
More Mortgage-Backed Security (MBS) Instrument and Market Features questions
- Interest rates fall sharply, and borrowers in a pool of 30-year fixed-rate mortgages refinance in large numbers. For an investor in the pass…
- A borrower takes a 25-year mortgage whose monthly payments cover interest only for the first five years. After that, payments rise so that t…
- Compared with a pass-through security priced at par, a mortgage pass-through priced at a significant premium to par is most likely to experi…
- A planned amortization class (PAC) tranche is most likely to maintain its scheduled principal payments:
- A CMBS loan with a 10-year term and a 30-year amortization schedule is most likely to expose investors to which risk near maturity?
- In a non-agency residential mortgage-backed security, the creation of a senior tranche and a subordinated tranche, with losses absorbed firs…