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Level II
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Fixed Income
Fixed Income
Medium
Lakewood Mortgage Trust issues a pass-through security backed by 30-year mortgages with a gross coupon of 6.00% and a servicing fee of 0.50%. If interest rates decline by 200 bps, the investor in this pass-through is most likely to face:
A
Contraction risk, as homeowners refinance and principal is returned early
B
Extension risk, as homeowners hold their mortgages longer
C
No prepayment impact, because the servicing fee absorbs rate movements
D
Credit risk, as declining rates increase default rates
Select an answer to continue
Tags
#mortgage-pass-through
#contraction-risk
#prepayment-risk
#mbs
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