CFA Practice Question

CFA Practice Question

When a mortgage loan is included in a pool of mortgages used as collateral for a passthrough security, it is said to be which of the following? Choose the best answer.
A. Collateralized
B. Tranched
C. Securitized
Explanation: When a mortgage is included in a pool of mortgages used as collateral for a passthrough security, the mortgage is said to be "securitized." The securitization of mortgages has been a very important development in the field of finance, and has aided significantly in the availability of capital and the completeness of the debt market. While conceptually correct, "collateralized" does not represent the best possible answer.

User Contributed Comments 4

User Comment
iambroke why is it different from a collateralized debt obligation?
asalonga7 passthrough means that the cash flows are being passed on directly to the investor - the mortgage isn't the collateral behind the security - it basically becomes the security, the collateral would be the house/property
GBolt93 CDO's split the mortgage payments into different tranches. E.G. you can have a bundle of low grade mortgages with Tranches rated from AAA to low grade by giving them different seniority.
rstev316 Securitization is the process of converting a Mortgage (or other Financial asset) into a pass through security such as a CDO/CMO. Note the emphasis on what is occurring to the Mortgage, thus the last point "conceptually correct "collateralized" is the end result. In short, you can securitize a Mortgage into a pass through security which could be a CMO.

Another infamous "best possible answer"
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