SIE practice questionmediumMortgage-Backed Securities and CMOs
Which risk is most significant for investors in mortgage-backed securities such as CMOs?
- ALiquidity risk
- BPrepayment risk✓ Correct answer
- CCurrency risk
- DReinvestment risk
Explanation
Why B — Prepayment risk
Prepayment risk is most significant for mortgage-backed securities since homeowners may pay off loans early, affecting expected cash flows. Liquidity and currency risks are generally less for agency CMOs, and reinvestment risk affects all bonds but is not unique to CMOs.
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