Which of the following is true concerning collateralized mortgage obligations (C

Question

Which of the following is true concerning collateralized mortgage obligations (CMO) ahead of the 2008-09 U.S. financial crisis?

Select one:

A. All subprime mortgage bonds were pooled together in a single CMO tranche.

B. Once a CMO was created and rated, it became ineligible for further securitization.

C. A low-rated group of securities could never be given a higher rating in a CMO tranche.

D. None of the above

During the 2008-2009 U.S. financial crisis:

A. Banks' balance sheets strengthened with the increase in availability of credit

B. The value of such financial derivatives as mortgage-backed securities (CMO) increased significantly

C. There was a significant increase in the number of home mortgage defaults

D. All of the above

Which of the following statements is true on the eve of the 2008-09 U.S. financial crisis?

a. The supply of existing homes in the U.S. reached a nearly 11 month "overhang"

b. Home prices increased significantly beyond historic norms

c. Subprime mortgage lending spiked upward

d. All of the above

Explanation / Answer

Part I. Option D None of the above . Since during this time, CMO were created from sub prime mortgage and then further CMO were created from these CMO also plus CMO created tranches which had higher ratings (not all tranches) than the underlying security.

Part II. Option C - there was significant increase in the number of home mortgage defaults

Part III. option D

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