单选题

For a collateralized mortgage obligation (CMO), the first tranche of bonds most likely has the:

A、 highest level of prepayment risk and interest rate risk.
B、 lowest level of prepayment risk and highest level of interest rate risk.
C、 highest level of prepayment risk and lowest level of interest rate risk.

【正确答案】 C

【答案解析】

C is correct. The first tranche of bonds in a CMO receives all monthly principal first until it is paid off; thus, it has the shortest duration of all remaining tranches and, therefore, the lowest interest rate risk. The first tranche also absorbs all prepayments and, therefore, has the highest prepayment risk compared with the remaining tranches.