CFA CFA Level 1 CFA Level 1 Question of the Week – Fixed Income Investments

CFA Level 1 Question of the Week – Fixed Income Investments

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    • Matt_AnalystPrep
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      A
      director at a large Wall Street bank made the following comment on a renowned
      business channel:

      ”Support tranches have both more contraction risk and more extension risk than
      the underlying mortgage-backed security (MBS), and have a lower promised
      interest rate than the planned amortization class (PAC) tranche.”

      Which
      of the following statements is most accurate?

      • A. The director’s comment is accurate.
      • B. The director’s comment is inaccurate; support tranches have only more
        extension risk than the underlying mortgage-backed security (MBS), and have
        a lower promised interest rate than the planned amortization class (PAC)
        tranche.
      • C. The director’s comment is inaccurate; support tranches have both more
        contraction risk and more extension risk than the underlying
        mortgage-backed security (MBS), and have a higher promised interest rate
        than the planned amortization class (PAC) tranche.
    • Matt_AnalystPrep
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      The correct answer is C.

      Support tranches have both more contraction risk and more extension risk than the underlying mortgage-backed security (MBS), and have a higher promised interest rate than the planned amortization class (PAC) tranche.

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