Collateralized mortgage obligations (CMOs) offset some of the problems associated with traditional mortgage pass-throughs because
A) they are overcollateralized.
B) they have variable rates.
C) they are collateralized by auto-loans.
D) they are deep discount instruments.
E) they are collateralized by credit card debt.

Question

Quizplus · Accepted Answer

CMOs are overcollateralized, meaning there is more collateral backing the security than the face amount of the security itself. This reduces the risk of default and also allows for the creation of different tranches with different risk and return characteristics. The other answer choices are incorrect because CMOs are typically collateralized by mortgages, not auto loans, credit card debt, or other types of assets. Additionally, CMOs may have both fixed and variable rates, but this is not their primary distinguishing characteristic. Finally, CMOs are not deep discount instruments, although some tranches may have higher yields than others.

Collateralized Mortgage Obligations (CMOs) Offset Some of the Problems Associated