Pro Rata or By Class

Rule 3 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

A pass-through pays every holder the same share. NOT two names for one security.

The method for this kind of question

Section 2 is the heaviest block

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

A pass-through security and a collateralized mortgage obligation both pool mortgages. How do they differ in how they pay investors?

A. A pass-through pays every holder pro rata; a CMO pays classes in a set order B. A pass-through pays classes in order; a CMO pays every holder pro rata C. Both pay every holder the identical pro rata share D. Both pay strictly by class, with no pro rata structure available

How sure are you?

Sure Fairly sure Guessing

Correct: A. A pass-through pays every holder the same pro rata share; a CMO cuts the cash flows into classes and retires early classes first.

B. Reverses the two structures.

C. Only the pass-through is pro rata; the CMO sorts cash flows into classes.

D. Only the CMO pays strictly by class; the pass-through is pro rata.

Unit: SIE outline 2.1.2

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