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Basic Question 4 of 8
A fall in interest rates is most likely to decrease the interest rate risk of a ______.
B. Z-tranche
C. PAC tranche
A. support tranche
B. Z-tranche
C. PAC tranche
User Contributed Comments 7
| User | Comment |
|---|---|
| americade | so will a z tranche (have shorter duration) |
| danlan2 | Support tranche is exposed to such risk. |
| PhiWong | Should the supporting tranche absorb any prepayment and hence it has higher interest rate risk. The value of the supporting tranche will fall faster than the PAC tranche? |
| PhiWong | Excess principal payment received by support tranche faces reinvestment risk since this tranche holder will have to reinvest in lower interest rate. |
| ehc0791 | From short duration perspective, the interest rate risk is lower. However, reinvestment risk is higher. |
| ramdabom | What not z/accrual tranche as well? |
| rana1970 | Guys, Question is specifically asking for interest rate risk, not the reinvestment risk, not even the total risk. Well actually I think a support trenches holder will be happy to rise in price due to fall in interest rate. Isn't it? Comment please? |
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Learning Outcome Statements
describe types and characteristics of residential mortgage-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, and explain the cash flows and risks for each type
CFA® 2024 Level I Curriculum, Volume 4, Module 19.