Exercise
Choose the best response to each question.
1.Which of the following are characteristics of CMOs?
I.They offer one coupon rate.
II.They offer a range of coupon rates.
III.They offer one maturity date.
IV.They offer a range of maturity dates.
A.I and III
B.II and III
C.I and IV
D.II and IV
2.Which of the following is true of GSEs?
A.They must pay state and local taxes.
B.They are overseen by the SEC.
C.They have a line of credit greater than $2 billion.
D.They are publicly owned.
3.Which of the following is not true of MBSs?
A.They are subject to prepayment risk, which is more likely when interest rates rise.
B.They pay varying monthly interest payments.
C.They are known as pass-through securities.
D.They are subject to extension risk, which means the investor gets his money back more slowly than expected.
Answers
1. D. Traditional MBSs only have one coupon rate and one maturity date. However, because their investment pools are sliced into tranches, CMOs offer a range of