(plannded amortization class) CMO and MBS

(Question) An endowment fund.

• MBS
• "Because the cash requirements of the endowment fund fluctuate directly with interest rates, the cash flows provided from the MBS will provide adequate protection against cash shortfalls arising from differences in the timing of cash needs and cash sources."
• CMO
• "In addition, we can further reduce uncertainty surrounding the timing of cash flows by purchasing planned amortization class CMOs, which are securities issued against pools of MBS."
• CMBS
• "CMBS were not presented due to the unacceptable risk profile of the comparable CMBS trading in the market place."

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MBS and (plannded amortization class) CMO

Interest rate		↓	↑
Cash requirements of the endowment fund		↓	↑
MBS:
Prepayment		↑	↓
Cash flow from an MBS		↑(*1)	↓(*2)

(*1) Cash flows to be realized earlier than expected.
(*2) Delaying expected cash flows.

• MBS
• The statement is incorrect.
• If the endowment fund has cash flow needs that vary directly with interest rates, it will need a source of funds that varies in the same way.
• Planned amortization class CMOs
• The statement is correct.
• The structure gives these securities a relatively predictable life.