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.

Question

Quizplus · Accepted Answer

Burn-out factor refers to the percentage of the outstanding mortgage pool that has been prepaid. It is called the "burn-out" factor because a mortgage loan that has been paid off or prepaid reduces the size of the mortgage pool, which means that the remaining loans have a larger share of the pool. This reduces the prepayment risk for investors in mortgage-backed securities.

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