- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 19. Mortgage-Backed Security (MBS) Instrument and Market Features
- Subject 4. Collateralized Mortgage Obligations
CFA Practice Question
A support tranche ______ value when interest rates ______.
II. loses; rise
III. gains; fall
IV. gains; rise
I. loses; fall
II. loses; rise
III. gains; fall
IV. gains; rise
Correct Answer: I and II
Support tranches are exposed to both contraction and extension risks.
User Contributed Comments 7
| User | Comment |
|---|---|
| katybo | got this wrong, forgot extension risk. |
| danlan2 | What is support tranche? Support tranche absorb both risks. |
| actiger | Tricked me! I thought of the same thing but didn't think there could be two answers... |
| Rchan89 | so why would anyone would these support tranches? |
| rana1970 | Because it cheaper to buy compared to other trenches |
| davidt876 | This question makes no sense logically. If interest rates increase increase from 2-3% the value falls. Then interest rates decrease from 3 back to 2%, and the value falls again... So... The value of this asset is perpetually falling to 0, as interest rates constantly change? I get the point is to relate value back to risks, but this is just stupid |
| davidt876 | Yes I am overreacting because I got a lot wrong in this chapter.. what of it? |