- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 1. Market Organization and Structure
- Subject 3. Financial Intermediaries
CFA Practice Question
Investors in a mortgage pass-through security face ______.
B. the same prepayment risk as investors in individual mortgages
C. no prepayment risk
A. more predictable prepayment risk than investors in individual mortgages
B. the same prepayment risk as investors in individual mortgages
C. no prepayment risk
Correct Answer: A
User Contributed Comments 5
| User | Comment |
|---|---|
| mtcfa | Because of Diversification. |
| cp24 | because of the pooling of risk |
| whipp | an investor of a passthrough gains the diversification benefits -- the prepayment risk now is spread over a pool of mortgages |
| fabsan | Diversification reduces the risk by pooling the mortgage assets together. The risk, we are referring here is the risk that the borrower will prepay the mortgage before the maturity date. Therefore the lender (Mortgage back security holder) will loose interest payment scheduled. Because we pooled all the mortgages together, it is easier by using the probability theory to predict the prepayment risk. |
| khalifa92 | The cash flows of the more senior tranches have more predictability than those underneath "their juniors." |