CFA Practice Question

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CFA Practice Question

A fall in interest rates is most likely to decrease the interest rate risk of a ______.

A. support tranche
B. Z-tranche
C. PAC tranche
Correct Answer: A

A fall in interest rates will increase prepayments, and most (if not all) of these will go to the support tranche, which will then have a shorter duration.

User Contributed Comments 7

User Comment
americade so will a z tranche (have shorter duration)
danlan2 Support tranche is exposed to such risk.
PhiWong Should the supporting tranche absorb any prepayment and hence it has higher interest rate risk. The value of the supporting tranche will fall faster than the PAC tranche?
PhiWong Excess principal payment received by support tranche faces reinvestment risk since this tranche holder will have to reinvest in lower interest rate.
ehc0791 From short duration perspective, the interest rate risk is lower. However, reinvestment risk is higher.
ramdabom What not z/accrual tranche as well?
rana1970 Guys, Question is specifically asking for interest rate risk, not the reinvestment risk, not even the total risk.
Well actually I think a support trenches holder will be happy to rise in price due to fall in interest rate. Isn't it? Comment please?
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