SIE practice questionmediumPrepayment Risk
Prepayment risk is MOST commonly associated with:
- AMoney market instruments
- BCommon stocks
- CU.S. Treasury bonds
- DMortgage-backed securities (MBS) and callable bonds✓ Correct answer
Explanation
Why D — Mortgage-backed securities (MBS) and callable bonds
Prepayment risk primarily affects MBS (homeowners refinance when rates fall, returning principal early) and callable bonds (issuers redeem bonds early when rates fall). In both cases, investors receive principal back sooner than expected and must reinvest at lower rates. Treasuries (A) are generally not callable. Stocks (B) and money market instruments (D) do not have prepayment risk.
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