What is the biggest risk faced by investors in MBS backed by high-quality mortgages and/or backed by strong credit enhancement or guarantees?
A) Credit Risk
B) Default Risk
C) Prepayment Risk
D) All are equally important
Reveal the Answer
The answer is C) Prepayment Risk – Given the credit (default) risk minimization implied in the question, the biggest uncertainty will be the rate at which the mortgage is prepaid.
