Corporate Bonds
Prepayment risk is MOST associated with which type of security?
Prepayment risk = MBS. Homeowners refinance when rates fall, returning principal early.
Complete Analysis & Legal Rationale
Mortgage-backed securities (MBS) have significant prepayment risk because homeowners can pay off mortgages early, especially when interest rates fall. This forces investors to reinvest at lower rates.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
T-bills are short-term and have no prepayment risk.
Corporate debentures may have call risk but not prepayment risk from underlying assets.
Matches the verified teaching point in the explanation.
GO bonds have call risk but not the ongoing prepayment risk of MBS.
Official Standard: Outline-level citation pending rule-specific upgrade. Verify against current FINRA Series 7 outline.