Which of the following affect the value of a PO strip based on a GNMA bond?
I. changes in the PSA schedule
II. prepayment rates
III. time value of money
IV. changes in the default rates for the underlying mortgages

Question

Quizplus · Accepted Answer

The value of a Principal Only (PO) strip from a GNMA bond is affected by changes in the PSA schedule (I), prepayment rates (II), and the time value of money (III). Changes in the default rates (IV) do not directly affect PO strips because GNMA guarantees timely payment of principal, thus mitigating the impact of defaults.

Which of the Following Affect the Value of a PO