I see MBS turn up in several exercises but I cannot find anything about it in the fixed income book. Is it part of this year’s curriculum?
Contingent claims risk (Source: CFA Volume 4 Reading 20 Section 4.1.2.2)
When a security has a contingent claim provision, explicit or implicit, there is an associated risk. In a falling rate environment, the manager may have lucrative coupon payments halted and receive principal (as is the case with mortgage-backed securities when the underlying mortgages prepay principal). The loss of the coupons is bad enough but now the principal must be reinvested at a lower rate.