Question 10.6: What special risks do securitized assets present to institut...

Securitized assets often carry substantial interest-rate risk and prepayment risk, which arises when certain loans in the securitized-asset pool are paid off early by the borrowers (usually because interest rates have fallen and new loans can be substituted for the old loans at cheaper loan rates) or are defaulted. Prepayment risk can significantly decrease the values of securities backed by loans and change their effective maturities. Also, the substantial weaknesses among these investments, including sharp deterioration in their market values as the underlying assets (loans) experienced a significant rise in default rates.