CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Select the correct statement(s).

I. The PSA model is a prepayment model.
II. By creating a CMO, an issuer eliminates the prepayment risk associated with the underlying mortgage loans.
III. In the CMO market, the mortgage-backed securities sector has the greatest prepayment risk and the pass-through sector is the safest sector in terms of prepayment risk.
A. I only
B. II or III
C. None of them
Explanation: I. The PSA model is not a prepayment model as it does not predict prepayments for a mortgage-backed security. It is a generic benchmark that hypothesizes about the pattern of prepayments over the life of a mortgage-backed security.

II. Prepayment risk can never be eliminated. Rather, the character of prepayment risk can be altered.

III. Some tranches (i.e., support tranches) in the pass-through sector are riskier than the mortgage-backed securities sector.

User Contributed Comments 1

User Comment
Paulvw Regarding 1: Although the LOS calls the PSA a Prepayment Model, it is actually NOT.
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