Why Are the Class C Bonds of a CMO Highly

question 1

Multiple Choice

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.

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Definitions:

Marginal Cost

The expenditure involved in fabricating one more unit of a product or service.

Average Total Cost

Average total cost is the total cost of production divided by the quantity of output produced, indicating the cost on a per-unit basis.

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Marginal Cost

The cost associated with producing an additional unit of output, emphasizing the concept of incremental expense in production processes.