Which of the following is likely to have a negative effective duration?
A) A high coupon, interest only mortgage-backed security that is pre-paying at a high rate.
B) A low coupon U.S. Treasury bond.
C) Fed Funds purchased.
D) Demand deposits
E) None of the above can have a negative effective duration.

Question

Quizplus · Accepted Answer

A high coupon, interest only mortgage-backed security that is pre-paying at a high rate is likely to have a negative effective duration due to the high prepayment rate, which shortens the expected cash flows and causes the security's price to rise less in response to a decrease in interest rates.

Which of the Following Is Likely to Have a Negative