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Basic Question 1 of 11

Which of the following statements is (are) true with respect to the characteristics associated with mortgage pass-through securities?

I. The prepayment privileges that mortgagors possess is effectively the equivalent of issuing straight debt and then purchasing a bond call option.
II. The pass-through coupon rate that MBS investors will receive will always be slightly less than the mortgage rate applicable to the pool.
III. The timing of the cash flow stream from a mortgage passthrough security is just as uncertain as that of a callable bond.
IV. The weighted average maturity (WAM) of a mortgage pool is also its effective duration.

User Contributed Comments 1

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actiger Very good question! I like it.
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Colin Sampaleanu

Colin Sampaleanu

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;

define prepayment risk and describe the prepayment risk of mortgage-backed securities;

CFA® 2024 Level I Curriculum, Volume 4, Module 45.