Question

Which of the following statements describes the greatest risk associated with mortgage-backed securities?

A. Borrowers might default on their mortgage payments
B. The market for mortgage-backed securities is illiquid
C. The market price of the bonds might fall due to a rating downgrade
D. Falling interest rates might accelerate early repayment of principal

Answer 1

The greatest risk associated with mortgage-backed securities is borrower default on mortgage payments.

Step-by-step explanation:

The greatest risk associated with mortgage-backed securities is that borrowers might default on their mortgage payments (Option A). During the 2008 recession, many borrowers were unable to make their mortgage payments when interest rates rose, leading to defaults and financial losses for investors in mortgage-backed securities.