Mutual funds that invest in mortgage-backed pass-through securities are exposed to which of the following risks and costs? a. Credit risk
b. Liquidity risk
c. Interest rate risk
d. Capital adequacy requirements
e. Prepayment risk

e. Prepayment risk

Explanation:

Prepayment risk is the likelihood of the firm where Special Purpose Vehicle that manages the mortgage-backed pass-through securities to repay the principal sum invested or part of it earlier than expected which then denies the investor of interest payments throughout the investment period.

When principals are repaid much earlier, the interest that could be earned on the principal is lost since the principal upon which the interest is to be computed has been repaid, hence, no more basis for the interest thereafter

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