Ask Question
BusinessBusiness
23 August, 12:11

A collateralized mortgage obligation pays a 2% coupon rate on the first tranche plus any prepayments until its $50 million par value is retired. The second and third tranches receive 4% and 5% coupon rates. The third tranche receives principal only after the second is retired. Which statement is most accurate?

a) Each tranche has the identical level of risk

b) The first tranche has the highest prepayment risk

c) The second tranche has no prepayment risk

d) The third tranche is the least risky

+2
Answers (1)
  1. 23 August, 14:57
    0
    The correct answer is b) The first tranche has the highest prepayment risk.

    Explanation:

    A collateralized mortgage obligation (CMO) is a type of security backed by mortgage. It is comprised of a pool of mortgages that are bundled together and sold as an investment. Prepayment risk is the risk of loss of interest income due to early repayment of the principal by the borrower.

    In the given situation, there are three tranches. The first tranche has the highest prepayment risk because it is receiving principal at the earliest. Hence, there is more of a chance of this principal being returned early and the CMO holder losing out on potential interest. Therefore, the prepayment risk of the first tranche is the highest among all three tranches.
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “A collateralized mortgage obligation pays a 2% coupon rate on the first tranche plus any prepayments until its $50 million par value is ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers
You Might be Interested in
A total of 700 tickets were sold for a game for a total of $3420. If adult tickets sold for $7 each and child tickets cost $3 each, how many of each kind of ticket were sold?
Answers (1)
The process by which different individuals and units perform specific parts of the larger task is called? user: the procedures that link the various parts of the organization for the purpose of achieving the organization's overall mission are called?
Answers (1)
You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.
Answers (1)
Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour.
Answers (1)
The main problems of setting up a snack shop at a school
Answers (1)
New Questions in Business
18. What was a major factor in the failure of (mostly) command economies? A. Lack of voting rights B. Lack of the profit motive C. Not enough military spending D. Abundant basic goods
Answers (2)
You are saving to buy a $188,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 7.3 percent.
Answers (1)
Has the company you're auditing recently increased or decreased their operations due to mergers or sales of parts of the business?
Answers (1)
Tom lives in an apartment where he pays $8,000 a year in rent. Sarah lives in a house that could be rented for $10,000 a year. How much do these housing services contribute to GDP?
Answers (1)
What happens to the percentage of tax as the income that is taxed?
Answers (1)
Home » Business » A collateralized mortgage obligation pays a 2% coupon rate on the first tranche plus any prepayments until its $50 million par value is retired. The second and third tranches receive 4% and 5% coupon rates.
Sign Up Forgot Password?