Mortgage-Backed Securities Quiz

The risk that occurs when prepayments happen slower than expected, causing investors to receive cash flows later than anticipated.

The primary factor influencing the speed of mortgage prepayments. When interest rates fall, borrowers are more likely to refinance their loans, leading to faster prepayments.

A feature of Mortgage-Backed Securities (MBS) that limits price appreciation during periods of falling interest rates. This is because prepayment options make it harder for MBS prices to rise as quickly as other fixed-income securities.

A type of MBS structure that aims to allocate contraction and extension risks among different bond classes. This helps investors find the right risk profile for their needs by separating the prepayment risk into distinct investment classes.

Mortgages with low Loan-to-Value (LTV) and Debt-to-Income (DTI) ratios, indicating lower risk, are considered prime loans.

The time-weighted average period until the principal of a mortgage-backed security (MBS) is repaid. It takes into account prepayments, which can make the actual repayment period shorter than the stated maturity.

A prepayment model for mortgage-backed securities that assumes prepayment rates increase with loan age and then level off. It is based on the idea that prepayments are initially slow, then increase as loans age, and eventually stabilize.

The annualized percentage of the remaining mortgage balance that is expected to prepay in a mortgage-backed security (MBS). It measures the rate at which borrowers prepay their mortgages during a year.

The risk that mortgage-backed securities (MBSs) will experience a decrease in value due to a higher-than-expected rate of prepayments. This is more likely to occur when interest rates fall, leading to refinancing.