SIE practice questionmediumMortgage-Backed Securities
What is a unique risk of mortgage-backed securities (MBS) compared with traditional corporate bonds?
- AInterest rate risk is absent
- BIssuer default risk is higher
- CPrepayment risk due to underlying mortgages being paid off early✓ Correct answer
- DThey cannot be sold in the secondary market
Explanation
Why C — Prepayment risk due to underlying mortgages being paid off early
MBS face prepayment risk; homeowners may pay off mortgages early, affecting payments. Issuer risk is often lower, interest rate risk exists, and MBS are actively traded.
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