Seeing is believing!
Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.
Basic Question 8 of 8
The presence of a shifting interest mechanism ______ for the senior tranche.
II. increases contraction risk
III. reduces credit risk
IV. reduces contraction risk
I. increases credit risk
II. increases contraction risk
III. reduces credit risk
IV. reduces contraction risk
User Contributed Comments 2
| User | Comment |
|---|---|
| wink26 | Allocating a large % of prepayments to senior tranche could shorten duration, and increase contraction risk (but it reduces credit risk because the senior tranche gets to pocket the prepays first). |
| kodali | Also by having the sub-ordinate tranches still avaialable, they helps senior tranches by absorbing defaults first |
I used your notes and passed ... highly recommended!
Lauren
Learning Outcome Statements
describe types and characteristics of residential mortgage-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, and explain the cash flows and risks for each type
CFA® 2025 Level I Curriculum, Volume 4, Module 19.