dennis_cmpe
New Member
Can you clarify the explanation for this question? I don't understand how it answers the question.
Here was my approach to this problem (please correct if I'm way off track):
1) MBS securities -> negative convexity
2) Steepening yield curve -> higher yields -> lower prices
I thought the answer would be either B or D since prices will drop for the MBS security, and therefore negative convexity won't really matter.
Even if yields did get to the point where negative convexity kicked in, the price of the MBS would still be much higher than when yields rise?
I chose D.
22) At present market levels, which yield curve shift is most dangerous to holders of mortgage-backed securities (MBS) 6.5% notes?
a. Parallel yield curve shift in a market rally
b. Steepening yield curve shift in a market rally
c. Flattening yield curve shift in a market rally
d. Steepening yield curve shift in a market sell-off
ANSWER: C
As the market intensifies, negative convexity increases much faster due to rapidly shortening duration.
Here was my approach to this problem (please correct if I'm way off track):
1) MBS securities -> negative convexity
2) Steepening yield curve -> higher yields -> lower prices
I thought the answer would be either B or D since prices will drop for the MBS security, and therefore negative convexity won't really matter.
Even if yields did get to the point where negative convexity kicked in, the price of the MBS would still be much higher than when yields rise?
I chose D.
22) At present market levels, which yield curve shift is most dangerous to holders of mortgage-backed securities (MBS) 6.5% notes?
a. Parallel yield curve shift in a market rally
b. Steepening yield curve shift in a market rally
c. Flattening yield curve shift in a market rally
d. Steepening yield curve shift in a market sell-off
ANSWER: C
As the market intensifies, negative convexity increases much faster due to rapidly shortening duration.