The first tranche of a collateralized mortgage obligation has
A) the greatest default risk and the least prepayment risk.
B) the greatest prepayment risk and default risk.
C) the greatest prepayment risk and the least default risk.
D) the least prepayment risk and default risk.

Question

Quizplus · Accepted Answer

The first tranche of a collateralized mortgage obligation (CMO) typically has the greatest prepayment risk because it is the first to receive any principal payments, including prepayments. However, it has the least default risk because it is also the first to receive interest payments, making it less likely to be affected by defaults compared to later tranches.

The First Tranche of a Collateralized Mortgage Obligation Has