SIE practice questionhardMortgage-Backed Securities
When mortgage rates fall, holders of GNMA securities are subject to which risk?
- ANo risk, as payments are guaranteed
- BCredit risk from the U.S. government
- CCurrency risk
- DPrepayment risk leading to reinvestment at lower rates✓ Correct answer
Explanation
Why D — Prepayment risk leading to reinvestment at lower rates
Prepayment risk rises as homeowners refinance. GNMA holders face little credit or currency risk; guarantees do not protect against reinvestment risk.
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