For a mortgage passthrough security, which of the following risks most likely increases as interest rates decline?
A. Balloon.
B. Extension.
C. Contraction.
C is correct. When interest rates decline, a passthrough security is subject to contraction risk. Contraction risk is the risk that the security will be shorter in maturity than was anticipated when the security was purchased due to higher than expected prepayments (which typically occurs when interest rates decline). Extension risk is the risk that when interest rates rise, there are fewer prepay?ments and, as a result, the security becomes longer in maturity than anticipated at the time of purchase. Balloon risk (common with commercial mortgage- backed securities), a type of extension risk, is the risk that a borrower will not be able to make the balloon payment when due.
A is incorrect because balloon risk is a type of extension risk. A passthrough security is subject to extension risk when interest rates rise (not decline).
B is incorrect because extension risk is the risk that when interest rates rise (not decline), there are fewer prepayments and, as a result, the security becomes lon?ger in maturity than anticipated at the time of purchase.
高顿网校温馨提醒
各位考生，2016年6月CFA备考已经开始，为了方便各位考生能更加系统地掌握考试大纲的重点知识，帮助大家充分备考，体验实战，高顿网校开通了全免费的
CFA题库（包括精题真题和全真模考系统），题库里附有详细的答案解析，学员可以通过多种题型加强练习，通过针对性地训练与模考，对学习过程进行全面总结。
点击进入CFA免费题库>>>
专业的CFA考生学习平台与职业发展平台，干货满满，抢鲜分享。欢迎关注微信号gaoduncfa
CFA学习与分享QQ群：490459770
490459772
写评论
