Prepayment risk is the risk associated with a mortgage's cash flow due to ________. More specifically, investors are concerned that borrowers will pay off a mortgage when prevailing mortgage rates fall ________ the loan's note rate.

Question

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Prepayment risk refers to the possibility that the borrower of a mortgage will pay off the loan earlier than expected, resulting in a loss for the investor who purchased the mortgage. When the prevailing mortgage rates fall below the loan's note rate, borrowers are more likely to refinance their mortgage, which increases the prepayment risk for investors. Therefore, choice C, prepayments below the loan's note rate, is the best option.

Prepayment Risk Is the Risk Associated with a Mortgage's Cash