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Hi @ykilstein, that’s so weird, @adossa3 just posted a similar question. Here’s my answer to #1:
For principle-only and interest-only MBS, here’s the conceptual reasoning:
- Declining interest rates increase PO repayment speed, lowering the discount rate and increasing the PO price. Hence +ve duration.
- Declining interest rates mean that repayments speed up, so there’s less interest paid (lower principal, plus lower interest rates), so IO value decreases. Hence -ve duration.
So yes, your statement on #1 is correct.
@ykilstein apologies – corrected!
@sophie 🙂 just wanna be extra sure, wouldn’t want @ykilstein to get the wrong concept to the exam hall 😛
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