Which of the Below Statements Is FALSE

question 37

Multiple Choice

Which of the below statements is FALSE?

• A) In 1987, CMO issuers began issuing bonds with the characteristic that if prepayments are within a specified range, the cash flow pattern is known. The greater predictability of the cash flow for these classes of bonds, referred to as planned amortization class (PAC) bonds, occurs because there is a principal repayment schedule that must be satisfied.
• B) PAC bondholders have priority over all other classes in the CMO issue in receiving principal payments from the underlying collateral.
• C) The greater certainty of the cash flow for the non-PAC bonds comes at the expense of the PAC classes, called the support bonds or companion bonds. It is these bonds that absorb the prepayment risk.
• D) Because PAC bonds have protection against both extension risk and contraction risk, they are said to provide two-sided prepayment protection.

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Definitions:

Dividend Growing

The increase in the amount of dividend payouts by a company over time.

Current Yield

The annual income (interest or dividends) divided by the current price of the security, often used to assess the return on investment in bonds.

Required Rate

The minimum expected rate of return by investors for providing capital to a company, often used in valuing investments.

Constant Dividend

A fixed amount of money paid to shareholders of a corporation out of its earnings on a regular basis.