The value of a PO will fall as a net effect if:

Question

Quizplus · Accepted Answer

The value of a PO (principal-only) security is inversely related to the level and volatility of interest rates. If market interest rates rise, the value of a PO falls. If prepayment rates fall (meaning borrowers are less likely to pay off their mortgages early), the duration of the PO increases, making it more sensitive to interest rate changes and causing its value to fall. Therefore, when market interest rates rise and prepayment rates fall, the value of a PO will fall as a net effect.

The Value of a PO Will Fall as a Net