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Problem 2. Investors in residential mortgage loans face four main risks credit risk liquidity risk price risk prepayment risk a. Specify these risk categories b

Problem 2. Investors in residential mortgage loans face four main risks

credit risk

liquidity risk

price risk

prepayment risk

a. Specify these risk categories

b Describe the credit risk and explain how it can be measured.

c Describe the liquidity risk. How has securitization changed liquidity of the mortgages?

d Describe the price risk. How does monetary policy affect price risk?

e Discuss the pre-payment risk. Should investors in mortgages be concerned about this risk? Why?

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