Question

Which two of the following are ordinarily true concerning prepayment of CMOs?

a. If interest rate falls prepayment increases.
b. If interest rate rise prepayment increases.
c. If interest rate falls prepayments decreases.
d. If interest rate rise prepayment decreases

Answer 1

A and D

Step-by-step explanation:

CMO which is an acronym for collateralized mortgage obligation is a term that defines a combination of supplies of mortgage that is, a form of secured loan, which serves as an investment fund that can be borrowed.

However, unlike a typical bond, in CMOs when interest rate declines prepayment rises and when interest rate increases prepayment falls or declines.

Hence, the correct answer is both Option A and D