US Govt Debt CMO's

FINRA FINRA Series 7
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Question…I just started this subchapter on CMO… Is CMO same as “collateral mortgage obligations”? According to your textbook reference…it says “Collateralized debt obligations”…nothing major. But I’m assuming the debt is referencing specifically to mortgage…

If so…maybe we should state “Collateral mortgage obligations.”

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Actually…I just came across this…

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So…CMO and CDO’s are different. LOL

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Hey @LASHY1980,

You beat me to it! I was just updating the page :slight_smile:

Thanks for pointing this out. Yep, CMO stands for “Collateralized mortgage obligations”. CMOs and CDOs are very similar, essentially CDOs are the wider category with a variety of debt instruments and not just mortgages.

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LOL. You welcome! Thanks for the quick response and update. :slight_smile:

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Is this CMO heavily tested on S7? I am so confused on how these CMO’s work…especially around PAC’s and TAC’s.

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Hi @LASHY1980!

While your exam will be somewhat random and unique, most Series 7 test takers don’t report seeing a significant amount of CMO questions on the exam. I’d expect at least a couple of questions on the topic, maybe upwards of 4-5 questions at most*.

*These are estimates based on reports test takers make in online forums, and are not guaranteed to be the case on your exam.

PACs and TACs are a subset of CMOs, so it’s possible you may not even get a single question on them specifically (maybe just a few general mortgage backed security questions). The Achievable practice and exam questions should give you a good idea of the most tested topics on PACs and TACs. The most important things to remember are:

  • PACs have protection against both prepayment and extension risk
  • TACs only have protection against prepayment risk
  • CMOs reduce prepayment and extension risk as compared to pass through certificates
  • Suitability for CMOs (in general):
    • Produces consistent and regular (monthly) income
    • Fairly safe from default risk (due to government backing); most are AAA rated
    • Subject to interest rate risk, and varying levels of prepayment or extension risk
    • Unknown maturity
    • Suitable for income-seeking investor with moderate to low risk tolerance; investor must be comfortable with unknown maturity, and potential prepayment and extension risk

I hope this helps!

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I have a question asking which Tranche is the safest. The answers choice are as follows:

  1. companion tranche
  2. Z-tranches
  3. planned amortization
  4. Targeted amortization

I chose 3. Am I right?

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You’re right, @A11! PACs are the safest due to their protection against both prepayment and extension risk. Z-trances are typically the most volatile, and therefore the riskiest.

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