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Answer: An investor in an agency MBS is not directly exposed to prepayment risk because the agency insures the investor against prepayment of individual mortgages
**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**. - Borrowers can still refinance or prepay their mortgages early. - That prepayment behavior affects the timing and amount of cash flows received by MBS investors. So the statement that the agency **insures** the investor against prepayment risk is false, making **C the exception**.
Author: Manit Arora
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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
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