26-51 A principal-only (PO)mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Question

Quizplus · Accepted Answer

Principal-only (PO) mortgage pass-through strip securities have a higher interest rate sensitivity compared to regular mortgage-backed securities (MBS). This is because the PO strips only receive payments based on the principal repayments of the underlying mortgage loans, and not the interest payments. Therefore, as interest rates rise, prepayments on the underlying mortgages slow down, and the PO securities receive higher cash flows, making them attractive to investors seeking increased interest rate sensitivity.

26-51 a Principal-Only (PO)mortgage Pass-Through Strip Security Is Attractive to Investors