Creditor, Not Owner

Rule 6 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

A bondholder's claim comes first. Before common and preferred stockholders. On income and on assets, both. NOT a share of the company.

The method for this kind of question

Section 2 is the heaviest block

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

Long-term mortgage rates fall sharply. What happens to prepayments on an outstanding mortgage-backed pass-through, and why?

A. Prepayments speed up, as borrowers refinance into cheaper loans B. Prepayments slow down, as borrowers refinance into cheaper loans C. Prepayments speed up, because the servicer is forced to call the pool D. Prepayments are unaffected by interest rates

How sure are you?

Sure Fairly sure Guessing

Correct: A. Falling rates make refinancing into a cheaper loan attractive, so principal is repaid early more often.

B. Falling rates make refinancing more attractive, speeding prepayments, not slowing them.

C. No servicer-forced call mechanism exists; the borrower, not the servicer, decides to prepay.

D. Prepayment speed is directly rate-sensitive, per the manual's own prepayment-option framing.

Unit: SIE outline 2.1.2

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