Mortgage-Backed Securities (MBS) are exposed to all four types of risks mentioned: Interest rate risk, Pre-payment risk, Default risk, and Credit risk.
Interest rate risk is the risk that the value of the MBS will decrease due to changes in interest rates. When interest rates rise, the value of the MBS falls because the fixed interest payments of the underlying mortgages become less attractive.
Pre-payment risk arises because homeowners have the option to prepay their mortgages, especially when interest rates decline and refinancing becomes advantageous. This prepayment option can affect the cash flows and yield of MBS.
Default risk is the risk that the mortgage borrower will fail to make the required payments on the underlying mortgage loan, which would reduce the cash flows available to MBS holders.
Credit risk is the risk that the issuer of the MBS or the underlying mortgage borrowers will default on their obligations, leading to potential losses for investors.
Since MBS are exposed to all four types of risks, the correct answer is C (I, II, III & IV).