QUESTION $4$

Which of the following statements is true about CMOs?

CMO is a type of mortgage$-$backed security where the pool is owned by issuer of the MBS and there are different securities based on the cash flows of the pool.

CMO is a type of mortgage$-$backed security where the pool is owned by the homeowners and there are different securities based on the creditworthiness of the homeowners.

CMO is a type of mortgage$-$backed security where the pool is owned by the government and there are different securities based on the interest rate risk of the underlying mortgages.

None of the options.

$2$ points

QUESTION $5$

Which of the following statements best describes prepayment risk?

Prepayment risk is the risk that borrowers will pay off their loans earlier than expected, which can result in a reduction in the cash flow to investors in a mortgage$-$backed security.

Prepayment risk is the risk that a borrower will default on their mortgage payments, leading to a loss of principal for investors in a mortgage$-$backed security.

Prepayment risk is the risk that borrowers will decide to keep paying their mortgages for longer than expected, resulting in a reduction in the overall return on the investment.

None of the options.