CFA Level 1 Question of the Week – Fixed Income Investments

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.