Final answer:
The expected maturity of the A class in a CMO would increase if the prepayment rate on the underlying mortgage pool decreases. This is because the payments toward principal are received more slowly, thus extending the period the principal is outstanding and the time until maturity for the A tranche.
Step-by-step explanation:
If the prepayment on the pool of mortgages that supports the CMO decreases from CPR 10% to CPR 5%, the expected maturity of the A class would increase. This is because a lower prepayment rate (CPR) means that the mortgages in the pool will be paid off more slowly than expected, causing the tranche to receive principal repayments at a slower pace. Consequently, the principal is outstanding for a longer period, thus extending the maturity of the A class. As prepayments slow, the first tranches, such as Tranche A, will have a delay in principal repayment as they are typically designed to absorb the initial prepayments, thereby protecting the subsequent tranches.
CMOs are structured to provide different levels of risk and return by redistributing the cash flows from the underlying mortgage loans. The A tranche, usually being the senior tranche, gets paid out first, followed by the B and so on. Therefore, changes in prepayment rates have a direct impact on the timing of when these tranches will be fully repaid. Since prepayment speed is a critical factor in the expected life of a CMO tranche, a decrease in the CPR rate will extend the expected life of the A tranche, assuming all else remains constant, according to typical CMO tranche behavior.