Collateralized mortgage obligations are relatively safe investments EXCEPT
A) when interest rates rise.
B) when inflation is high.
C) when home prices decline.
D) when mortgage holders refinance frequently.

Question

Quizplus · Accepted Answer

Collateralized mortgage obligations (CMOs) are backed by pools of mortgages, so if home prices decline and homeowners default on their mortgages, it can lead to losses for CMO investors. While rising interest rates and high inflation can both have an impact on CMOs, home price decline is the greatest risk. Frequent refinancing by mortgage holders can also affect CMO investors, but it is not as significant as the risk of a decline in home prices.

Collateralized Mortgage Obligations Are Relatively Safe Investments EXCEPT