medium · Asset-Backed Securities asset-nuances
An investor holds a Z-bond in a CMO structure. Which of the following best describes the cash flow profile of this instrument?
- It receives a floating rate coupon indexed to a reference rate but is contractually locked out of any principal payments for the first 5 years.
- It receives interest-only (IO) payments on its notional balance until the underlying mortgage pool amortizes by 50%.
- It receives scheduled principal and interest payments pro-rata alongside the most senior tranche in the deal's capital structure.
- It receives no cash interest or principal until all prior tranches are retired, with interest accruing to the principal balance.
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