An investor purchases a Ginnie Mae mortgage-backed security. If the underlying borrowers prepay their loans faster than expected, what risk does the investor primarily face?
Correct Answer
C) Prepayment risk affecting yield calculations
Ginnie Mae securities carry the full faith and credit guarantee of the U.S. government, eliminating credit risk. However, when borrowers prepay faster than expected, investors receive their principal back sooner and must reinvest at potentially lower rates, creating prepayment risk.
Why This Is the Correct Answer
Ginnie Mae securities carry the full faith and credit guarantee of the U.S. government, eliminating credit risk. However, when borrowers prepay faster than expected, investors receive their principal back sooner and must reinvest at potentially lower rates, creating prepayment risk.
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