CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

Investors in a mortgage pass-through security face ______.

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."
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