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Prepayment risk is the risk associated with a mortgages cash flow due to prepayments. Therefore, Mortgage-backed securities are regarded as bonds with embedded call options.

Prepayment risk is the risk associated with a mortgages cash flow due to prepayments. Therefore, Mortgage-backed securities are regarded as bonds with embedded call options. Who exercises the call options when mortgage interest rates decrease?

a. Issuers of mortgage-backed securities

b. Investors of mortgage-backed securities

c. Mortgage originators

d. Mortgage borrowers

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