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Describe the prepayment risk in a mortgage-backed bond guaranteed by the CMHC. (Select all of the choices that apply.) A. Holders of the CMHC securities
Describe the prepayment risk in a mortgage-backed bond guaranteed by the CMHC. (Select all of the choices that apply.) A. Holders of the CMHC securities face payment risk because homeowners have the option to prepay their debt whenever they decide to do so. B. In particular, homeowners will prepay if interest rates rise and they can refinance at the new interest rate. This is precisely when the holders of CMHC securities would like to avoid payments since they can only reinvest at a higher interest rate C. Holders of the CMHC securities face payment risk because CMHC has the option to force homeowners to repay their debt whenever interest rates rise. D. In particular, homeowners will prepay if interest rates fall and they can obtain new debt at a lower interest rate. This is precisely when the holders of CMHC securities would like to avoid payments since they can only reinvest at a lower interest rate
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