Corporate Bonds
Interest-only (IO) CMO tranches typically INCREASE in value when:
IO tranches receive only interest payments. When interest rates rise, fewer homeowners refinance, meaning mortgages last longer and more total interest is paid. This increases the value of IO tranches. This is counterint
Complete Analysis & Legal Rationale
IO tranches receive only interest payments. When interest rates rise, fewer homeowners refinance, meaning mortgages last longer and more total interest is paid. This increases the value of IO tranches. This is counterintuitive because most bonds lose value when rates rise, but IOs behave differently.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Does not match the governing securities rule described in the explanation.
Matches the verified teaching point in the explanation.
Does not match the governing securities rule described in the explanation.
Does not match the governing securities rule described in the explanation.
Official Standard: Outline-level citation: item maps to Series 7 topic coverage. Prefer a specific FINRA/SEC/MSRB rule citation in a later author pass.