An interest-only (IO) mortgage-backed strip is a rare example of a negative duration asset.

Question

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An interest-only (IO) mortgage-backed strip has a negative duration, meaning that its value increases as interest rates fall and decreases as interest rates rise. This is because as interest rates decrease, prepayments on the underlying mortgages increase, and the IO holder receives their share of those prepayments sooner. As a result, IO mortgage-backed strips are a rare example of a negative duration asset.

An Interest-Only (IO) Mortgage-Backed Strip Is a Rare Example of a Negative