CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to factors that influence prepayment patterns on mortgage passthrough securities?

I. Prepayments will increase dramatically if the level of mortgage rates begin to decrease relative to the weighted average coupon (WAC) rate of the pool.
II. An increase in the duration of mortgage pass-through securities generally coincides with an increasing interest rate environment.
III. Holding all other variables constant, as the economy deteriorates, the frequency and size of prepayments generally increase.
IV. The geographical location where most of the mortgages in a pool originate can have a dramatic affect on the prepayment rate.
A. II and IV
B. I, III and IV
C. I, II, III and IV
Explanation: I is incorrect. Just because the level of mortgage rates begins to decrease relative to the weighted average coupon (WAC) rate of the pool does not necessarily mean that mortgage rates will be below WAC. Only if mortgage rates are established to be below WAC can prepayments be expected to increase dramatically.

II is true. An increase in the duration of mortgage pass-through securities generally coincides with an increasing interest rate environment because when mortgage rates begin to rise, prepayments fall, causing the duration of the pool to increase.

III is incorrect. Holding all other variables constant, as the economy deteriorates the demand for real estate drops, causing mortgage turnovers to drop.

User Contributed Comments 1

User Comment
siggarusfigs "Holding all other variables constant" got me... i thought interest rates would go down in iii
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