In an agency CMO, there is ________. What is being done in creating the different tranches is the redistribution of ________. In contrast, in ________, there is both credit risk and prepayment risk.

Question

Quizplus · Accepted Answer

In an agency CMO, there is no credit risk because the securities are backed by government agencies, which essentially eliminates credit risk. However, there is prepayment risk, which is the risk associated with the early repayment of mortgages that can affect the cash flows to investors. Nonagency CMOs, on the other hand, do not have this government backing, thus they carry both credit risk and prepayment risk.

In an Agency CMO, There Is ________