Skip to content

CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features

In a non-agency RMBS, a shifting interest mechanism that directs a larger share of prepayments to senior tranches during the early years of the deal is most likely intended to:

The mechanism protects senior tranches. By sending most prepayments to seniors early on, it keeps the subordinated tranches outstanding longer, preserving the loss-absorbing cushion during the period when defaults are most likely, so senior credit enhancement does not erode.

  1. Aincrease the yield paid to the subordinated tranches
  2. Bprotect senior tranches by preserving the subordinated tranches' loss-absorbing cushionCorrect
  3. Creduce the pool's exposure to extension risk

Explanation

Shifting interest pays senior tranches most prepayments early, so the junior tranches remain outstanding longer and keep the subordination level high while default risk is greatest. It does not raise junior yields or remove extension risk.

Did you get it right without looking?

One question tells you little. A timed set on Mortgage-Backed Security (MBS) Instrument and Market Features shows your real accuracy, how long you take and where you lose marks.

Practise Mortgage-Backed Security (MBS) Instrument and Market FeaturesFree diagnostic mock

More Mortgage-Backed Security (MBS) Instrument and Market Features questions