If the prepayment schedule for a mortgage pool increases from 50 PSA to 100 PSA, the related interest-only strips will ________ in value and the related principal-only strips will ________ in value.

Question

Quizplus · Accepted Answer

When the prepayment schedule increases from 50 PSA to 100 PSA, the interest-only strips will decrease in value because the underlying mortgage pool will pay off faster, resulting in a shorter lifespan for the interest-only strip. On the other hand, the principal-only strips will increase in value because the underlying cash flows will pay down principal at a faster rate, resulting in a larger and earlier return of principal to the investor.

If the Prepayment Schedule for a Mortgage Pool Increases from 50