QUESTION 12 Total = 5 marks (2 marks) In your own words, explain what is meant by prepayment risk (b) Answer true or false to the following statements: (1 mark) ACMO provides protection against prepayment risk for all tranches. Note: Assume that the Collateralized Mortgage Obligation (CMO) has three tranches: A B and C where Tranche A receives principal payments first from the underlying mortgage pool, followed by Tranche B. folowed by Tranche Cand where all tranches receive interest while they are owed principal (n) [1 mark) Consider an interest-Only (10) security. If interest rates go up, the discount rate for valuing the cashflows to the 10 security-holders goes up and the price of the 10 security will go down (m) (1 mark) Consider a Principal-Only (PO) security. If interest rates go down, the discount rate for valuing the cashflows to the PO security-holders goes down and the price of the PO security will go up Note: You must provide an explanation for your answers to Questions bilbil and bil