This propensity to prepay means:
A)realised coupons/cash flows on pass-through securities would conform to expected cash flows
B)realised coupons/cash flows on pass-through securities can often deviate substantially from the stated or expected coupon flows
C)realised coupons/cash flows on pass-through securities are prepaid
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

Prepayment means that borrowers pay back their loans earlier than expected, which can cause realized coupons/cash flows on pass-through securities to deviate from the stated or expected coupon flows. Since a portion of the principal is being repaid early, this impacts the cash flow patterns of the securities. Therefore, choice B is the best option.

This Propensity to Prepay Means