A CMO does not completely eliminate prepayment risk.

Question

Quizplus · Accepted Answer

While a CMO (Collateralized Mortgage Obligation) can help to mitigate prepayment risk, it does not completely eliminate it. Prepayment risk still exists as borrowers may refinance or sell their homes, causing the underlying mortgages in the CMO to be paid off early. However, the various tranches in a CMO structure help to redistribute and allocate prepayment and interest rate risk among investors in a way that may be favorable to their investment objectives.

A CMO Does Not Completely Eliminate Prepayment Risk