SIE Exam Question 225: Answer and Explanation

Question: 225

What is an investment that involves investors receiving interest and principal payments on a monthly basis as a result of individual mortgages being paid down known as?

• A. A pass-through
• B. Separate Trading of Registered Interest and Principal of Securities (STRIP)
• C. Collateralized mortgage obligation
• D. TIPS

Correct Answer: A

Explanation:

Pass-throughs provide investors with interest and principal payment income relative to their initial investments in pools of mortgages. The payments flow through to them on a monthly basis as the individual mortgages in the pools are paid down. A Separate Trading of Registered Interest and Principal of Securities (STRIP) is an investment that provides the opportunity to purchase separately either the principal or interest payment cash flow stream of a Treasury security. Collateralized mortgage obligations (CMOs) are similar to pass-throughs except that they are separated into different maturity schedules, or tranches, each being paid in full one at a time. Treasury inflation protected securities (TIPS) are securities whose interest payments and principal amounts are influenced by the level and movement of inflation.