Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.

Question

BlackTom AI · Accepted Answer

In CMOs (collateralized mortgage obligations) cash flows are carved into named tranches; one tranche is the residual (equity) interest that receives whatever remains after all senior classes are paid. That residual tranche is known as Class R.

Relevant concepts:
- A CMO divides mortgage principal and interest into sequential and specialty tranches so that different investors receive different timing and risk exposures.
- Regular (senior) tranches (commonly labeled A, B, C, etc.) receive scheduled interest and principal according to the priority of payments.
- Z-tranches (accrual or zero tranches) typically defer interest and accumulate principal or interest until later — they are not the residual claim.
- The residual (equity) tranche receives remaining collateral and any reinvestment income earned by the trust after all other bond classes have been retired.

Step-by-step reasoning:
1. Identify which tranche gets “any remaining collateral in the trust after all other bond classes have been retired”: that language defines a residual/equity position.
2. Among the answer choices, Class R is the label commonly used for the residual class in CMOs.
3. Other classes (A, B, C) represent scheduled pay tranches with priority claims on principal/interest; they are paid before any residual distribution.
4. Class Z is an accrual/deferral tranche that builds up rather than being the catch‑all recipient of leftover collateral or reinvestment income.

Why Class R is correct:
Class R is explicitly the residual class — it takes the leftover principal and any reinvestment proceeds once the higher‑priority tranches have been retired. It bears the most credit and prepayment risk but also the potential upside from any remaining collateral value.

Why the other options are incorrect:
- Class A/B/C: senior or sequential pay tranches, not residual claimants.
- Class Z: accrual/zero-type tranche that defers payments; not the residual equity tranche.

Conclusion: The correct answer is b. Class R bonds, which matches the provided answer.

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.单项选择题

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