Agr principal sbse phle repay ho rha h then how is it a lowest risk tranch …. what i knw is prepayment risk is highest for the tranch that first receives the principal repayment. Option a ka explanation statement shi h itna smjh aa rha h but kaunse risk ki baat kr rha h ye explanation. Ofcourse credit risk and prepayment risk ki toh baat nhi hi kr rha toh then kaunsa risk h
I myself is confused incthe whole explanation ki kaunsa risk kis chiz k liye bol rhe h
Bhai vo in general pooch rha hai ki konsa statement correct hai agar aap baki do statement padhenge toh vo dono wrong hai, B, prepayment risk will not increase when the interest rate will increase, A, insurance companies will not prefer the lowest tranche so C is the correct option.
Option elimination se maine bhi sahi guess kiya tha but agr confusing options aaye toh uske liye concept claruty bhi toh chahiye
The lowest risk tranche is called the senior most tranche because these are the ones who hate extension risk. So they are prepaid faster as compared to others. Late prepayment can lead to Extension Risk which can further lead to Credit Risk because the money is still stuck up in the bonds and there might be a chance that it defaults. So, lowest risk tranche are paid earlier to atleast give them their money back.