SIE practice questionhardCMOs
Which investor concern is most significant when holding a CMO in a falling interest rate environment?
- AExtension risk
- BCall risk
- CPrepayment risk✓ Correct answer
- DCredit risk
Explanation
Why C — Prepayment risk
In falling rates, homeowners refinance, causing increased prepayments to CMO investors. Extension risk is a concern in rising rates; credit risk is low for agency-backed CMOs.
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