Products & Their RisksQuestion 29 of 398
A holder of a mortgage-backed pass-through security faces prepayment risk, which means:
a.Homeowners may repay their mortgages early, often when rates fall, returning principal sooner than expected
b.The issuer will always delay principal payments
c.The security can never be sold before maturity
d.The coupon rate automatically rises each year
Explanation
Prepayment risk arises because homeowners can refinance and pay off mortgages early, usually when interest rates drop, so investors receive principal back sooner and must reinvest at lower rates. It is not about delayed payments, illiquidity, or automatic coupon increases.
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