Deck 19 – MBS/CMBS Features

If market yields fall, what prepayment-related risk becomes more important for many MBS investors?

Contraction risk increases as refinancing speeds up prepayments.

Why would a professor test effective duration rather than modified duration for mortgage-backed securities?

MBS cash flows change with rates because borrowers can prepay.

Why can MBS-like securities show negative convexity at low yield levels?

Falling yields trigger prepayments, limiting price appreciation.

If market yields rise, what prepayment-related risk becomes more important for many MBS investors?

Extension risk increases as prepayments slow.