A portfolio manager is evaluating investments in mortgage securities as part of a portfolio to fund long term liabilities. If she wants to minimize prepayment risk in her portfolio she is most likely to invest in:

Question

Quizplus · Accepted Answer

Collateralized mortgage obligations (CMOs) provide a way to minimize prepayment risk in a mortgage security portfolio. CMOs are structured with different tranches that offer varying degrees of prepayment and interest rate risk, allowing a portfolio manager to select tranches with less prepayment risk. Mortgage loans have the highest prepayment risk as borrowers can prepay their mortgages at any time, while mortgage pass through securities have moderate prepayment risk as they can be prepaid as a result of refinancing or defaults. Investment evaluation is not a type of investment.

A Portfolio Manager Is Evaluating Investments in Mortgage Securities as Part