Why are the class C bonds of a CMO highly attractive to insurance companies and pension funds?
A)Because of their ability to offer perfect prepayment protection.
B)Because of the shortest average life with a minimum of prepayment protection.
C)Because of their long expected duration.
D)Because they are basically zero coupon bonds and hence carry a minimum amount of risk.
E)Because of their ability to offer perfect prepayment protection and because they are basically zero coupon bonds and hence carry a minimum amount of risk.

Question

Quizplus · Accepted Answer

Class C bonds of a CMO have a long expected duration, meaning they offer stable cash flows over a longer period of time. This makes them highly attractive to insurance companies and pension funds who have long-term liabilities to fund. Class C bonds usually have a higher yield than other classes of bonds, making them a preferred investment option for these institutions. Class C bonds do not offer perfect prepayment protection and carry a certain amount of risk, which is why they usually offer a higher yield.

Why Are the Class C Bonds of a CMO Highly