Question

which of the following mortgage-backed securities is most likely to feature credit tranching? a) collateralized mortgage obligations. b) commercial mortgage-backed securities. c) agency residential mortgage-backed securities.

Answer 1

Collateralized mortgage obligations is most likely to feature credit tranching.

What are Mortgage-backed Securities?

Bond-like financial products called mortgage-backed securities (MBS) are available. Each MBS consists of a collection of mortgages and other types of real estate debt that were acquired from the banks that issued them. Periodic payments akin to bond coupon payments are made to investors in mortgage-backed securities. The creation of mortgage-backed securities (MBS), a subset of asset-backed securities, relies only on the pooling of mortgages. In essence, the investor who purchases a mortgage-backed security is lending money to homebuyers.

CMOs are made up of various tranches or slices of pools of securities. The credit ratings assigned to the tranches affect the rates paid back to investors.

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