SIE practice questionhardPrepayment risk
What factor most increases prepayment risk in mortgage-backed securities?
- ARising interest rates
- BFalling interest rates✓ Correct answer
- CStable property values
- DInflation increases
Explanation
Why B — Falling interest rates
Falling rates encourage homeowners to refinance, boosting prepayments and risk. Rising rates reduce the incentive to prepay.
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