
Explanation:
Since the equity tranche has the highest level of risk in terms of both prepayments and losses, it generally offers the highest rate of return. It also bears the highest level of credit risk.
(Book 1, Module 4.1, LO 4.a)
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Question 76
Individuals who invest in mortgage-backed securities are given a wide range of investment possibilities to suit their risk and return preferences. The various tranches receive payments out of the pool's cash flows according to a specified schedule. Which of the following tranches should an investment advisor generally suggest to a client who is seeking the highest rate of return?
A
Super-senior tranche.
B
Equity tranche.
C
Senior tranche.
D
Mezzanine tranche.
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