Question

Collateralized mortgage obligation (CMO) tranche A has been created to have the most predictable near-term principal pay off. A tranche set up in this way will have

Answer 1

Answer: d. a lower yield

Explanation:

When a security is said to bring back predictable returns it means the security is of lower risk. A CMO tranche that has the most predictable near-term principal pay off is therefore the one with the a lower risk.

Riskier securities command higher yield than less riskier ones as a way to compensate the holder for taking on more risk. With tranche A having the lower risk, it will have a lower yield.