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Explanation:
Correct answer: C
Agency MBS do provide investors with substantial protection from credit risk through government agency support or guarantees, but they do not eliminate prepayment risk.
So the statement that the agency insures the investor against prepayment risk is false, making C the exception.
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Q-102.2. In regard to agency mortgage-backed securities (MBS), each of the following is true EXCEPT:
A
Agency MBS are those MBS in which government agencies are involved, in particular Ginnie Mae, Fannie Mae, or Freddie Mac as the major agency players
B
An investor in an agency MBS is not directly exposed to credit risk because the agency insures the investor against default of individual mortgages
C
An investor in an agency MBS is not directly exposed to prepayment risk because the agency insures the investor against prepayment of individual mortgages
D
Like Fannie Mae, Ginnie Mae provides credit guarantees. Unlike Fannie Mae, Ginnie Mae does not originate or purchases mortgage loans; nor does it buy, sell or issue securities