To hedge the risk that mortgages will be prepaid before they mature because the property is sold or refinanced, an investor should purchase

Question

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Collateralized mortgage obligations (CMOs) are a type of mortgage-backed security that are structured to address prepayment risk. CMOs are divided into different tranches, each with different maturities and different levels of risk. By investing in the right tranches, an investor can hedge against prepayment risk. This is because the higher tranches are paid off first, which means that the lower tranches are protected from prepayment. In contrast, options A, C, and D do not provide the same level of protection against prepayment risk.

To Hedge the Risk That Mortgages Will Be Prepaid Before