SchweserPro Debt

The strongest form of prepayment protection is: A) prepayment penalty points. B) a one year prepayment lockout. C) yield maintenance charges. D) defeasance.



Another question: Which of the following is least likely a reason why the lattice-based backward induction method cannot be used to value a MBS? A) Prepayments. B) Default risk. C) The path dependency of cash flows. D) Variable interest rates. Your answer: B was incorrect. The correct answer was C) The path dependency of cash flows. Backward induction can’t effectively capture path-dependent cash flows. Backward induction can account for many prepayments, default risk, and variable interest rates.