Which of the following best explains the term burn-out factor?
A)The percent of mortgage contract that is transferred from the seller to the buyer of a house.
B)The required interest spread of a pass-through security over a treasury when prepayment risk is taken into account.
C)The aggregate percent of the mortgage pool that has been prepaid prior to the month under consideration.
D)A mortgage-backed bond issued in multiple classes or tranches.
E)Bonds collateralized by a pool of assets.

Question

Quizplus · Accepted Answer

The burn-out factor is a measure of prepayment risk in mortgage-backed securities, representing the percentage of the mortgage pool that has been prepaid prior to the month under consideration. This is important to investors as it can impact the expected return on the security.

Which of the Following Best Explains the Term Burn-Out Factor