Mortgage-backed bonds (MBB) differ from pass-throughs and collateralised mortgage obligations (CMOs) in which of the following ways?
A)The MBB bondholders have a junior claim to assets of the FI.
B)There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB.
C)The assets backing a MBB issue are normally removed from the balance sheet of the FI.
D)Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.

Question

Quizplus · Accepted Answer

Unlike pass-throughs and CMOs, mortgage-backed bonds (MBB) do not have a direct link between the cash flow on the underlying mortgages and the interest and principal payments on the MBB. Instead, the cash flows from the mortgages are used to pay interest and principal on the MBB, but the timing of these payments may not match up exactly. Choice A is incorrect because MBB bondholders typically have a senior claim to the assets of the FI that issued the bond, not a junior claim. Choice C is incorrect because the assets backing an MBB issue are typically still on the balance sheet of the FI. Choice D is incorrect because tranches of an MBB can have different characteristics, such as different levels of prepayment risk.

Mortgage-Backed Bonds (MBB) Differ from Pass-Throughs and Collateralised Mortgage Obligations