Which of the following factors will always result in a mortgage prepayment?
I. Default
II. Stable interest rates
III. Refinancing bumout
IV. Increase in interest rates
A. I, II, III and IV
B. II and IV only
C. IV only
D. I only
Answer: D
Interest rates are related to whether the option to prepay is in-the-money and exercisable, but homeowners may choose not to prepay based on interest- rate levels. Defaults will always cause a prepayment because mortgages become payable in ful1 when mortgage payments are not made. In other words, if a payment is not made, the lender has the right to foreclose on the property. The other answer choices will not necessarily result in a prepayment.