FinMktHW8 - Financial Markets & Institutions Module 8...

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Module 8 Homework Page 557: 3) Refinancing risk is the risk that an early, unscheduled repayment of principal on mortgage-backed securities will occur when the underlying mortgages are refinanced by the borrowers. Reinvestment risk is the risk that future proceeds will have to be reinvested at a lower interest rate. The interest rate of increase on earnings will decrease. 4) The claim is not really true, because although the fund's asset portfolio has securities with no default risk, the securities are exposed to interest rate risks. If interest rates decrease, the yield on these securities will be less than the expected rate of return because of reinvestment risk. Investors who liquidate their positions in the fund may sell at a net asset value that is lower than the purchase price. 6) The zero-coupon bond would have more interest rate risk. The entire cash flow is not received until the bond matures, so it is exposed to interest rate changes over the life of the bond. The cash flow of the coupon-paying
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FinMktHW8 - Financial Markets & Institutions Module 8...

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