Скачать или смотреть Mortgage Backed Securities Explained | Prepayment & Extension Risk | Series 7 Exam Focus

This lesson explains Mortgage-Backed Securities (MBS), a high-risk, high-frequency testing area on the Series 7 General Securities Representative Exam, administered by FINRA.

FINRA does not test MBS as traditional bonds. Instead, MBS appear in scenario-based multiple-choice questions designed to assess whether candidates understand cash-flow uncertainty, reinvestment risk, prepayment risk, extension risk, and suitability, all from a consumer-protection perspective.

In this episode, we break down how MBS are created by pooling residential mortgages and why this structure causes principal to be returned over time, rather than at maturity. Candidates learn why MBS do not behave like standard bonds and why assuming “fixed income means fixed cash flow” is a major Series 7 exam trap.

A strong emphasis is placed on prepayment risk, which increases when interest rates fall, and extension risk, which increases when interest rates rise. These two risks explain why MBS can underperform in both falling-rate and rising-rate environments, albeit for different reasons. FINRA frequently tests these risks through client complaints about lost income or unexpected changes in maturity.

The lesson also focuses heavily on suitability, showing when MBS may be inappropriate for conservative investors, retirees dependent on predictable income, or clients who do not understand reinvestment risk.

This lesson serves as a critical bridge between traditional bonds and structured products, setting the foundation for Collateralized Mortgage Obligations (CMOs) and other complex securities.

This content is for educational purposes only and does not constitute financial or investment advice.

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Key Topics Covered

• What mortgage-backed securities are
• How MBS cash flows differ from traditional bonds
• Prepayment risk explained
• Extension risk explained
• Interest-rate impact on MBS
• Reinvestment risk and income uncertainty
• Why MBS yields are higher
• Mortgage-backed securities suitability on the Series 7