Final answer:
The primary risk for GNMA funds in a period of falling interest rates is reinvestment risk, due to the need to reinvest at lower rates after mortgages are paid off early. Default risk is virtually eliminated for GNMA funds, while principal and business risk are not directly related to the interest rates scenario.
Step-by-step explanation:
The primary risk on an investment in a Government National Mortgage Association (GNMA) fund in a period of falling interest rates is reinvestment risk. This type of risk arises when the interest rates drop, and the bonds within the GNMA fund are paid off earlier than expected because borrowers refinance their mortgages at lower rates. Investors then have to reinvest the principal at the new, lower rates, which can result in a decreased income from interest.
It's important to note that GNMA funds are backed by the full faith and credit of the U.S. government, which virtually eliminates default risk. Additionally, principal risk is often associated with market fluctuations, not specific to the interest rates, and business risk is more relevant to individual companies rather than government-backed securities.