Some Institutional Investors Are Concerned with Extension Risk and Others

question 51

Multiple Choice

Some institutional investors are concerned with extension risk and others with contraction risk when they invest in a pass-through. This problem can be mitigated by redirecting the cash flows of mortgage pass-through securities ________.

• A) to similar bond classes.
• B) to tranches.
• C) so as to create securities that have the same exposure to prepayment risk.
• D) so as to create securities that have the same risk/return patterns.

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Definitions:

Continental Army

The revolutionary war army authorized by the Continental Congress in 1775 to fight against British rule, commanded by General George Washington.

Articles of Secession

Documents drafted and ratified by the 11 Confederate states declaring their secession from the United States of America, leading up to the Civil War.

Military Strategy

The planning and execution of movements and operations by armed forces to achieve political or military objectives.

Invading Canada

A historical reference to various military campaigns, most notably during the War of 1812, where American forces attempted to invade territory in what is now Canada.