Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments?
A)Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect).
B)Low yields lead to faster prepayment of the mortgage pool's principal (good news effect).
C)With early prepayments comes fewer interest payments in absolute terms (bad news effect).
D)Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect).
E)Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).

Question

Quizplus · Accepted Answer

When mortgage interest rates decline, resulting in faster repayments, it generally means that any reinvestments would have to be made at the current lower rates, not higher. Therefore, the statement that faster cash flows due to prepayments can be reinvested at higher interest rates is not true.

Which of the Following Good News and Bad News Effect