26-73 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, the faster cash flows due to prepayments can be reinvested at higher interest rates, which is a good news effect. Option A is also a good news effect because lower market yields increase the present value of mortgage cash flows. Option B is a good news effect because low yields lead to faster prepayment of the mortgage pool's principal. Option C and D are bad news effects because fewer interest payments and lower reinvestment rates limit the potential returns of investors.

26-73 Which of the Following Good News and Bad News