IO strips price movement

Price keeps moving down as rates fall. or Price falls and then remains steady. I chose last one because of saturation in prepayments.

price goes up with interest rates initially then go down as interest rates keeps rising.

price doesn’t go down. It moves slower but never goes down. It has a negative convexity which means it slows down the movement but never stops.

Yes so in case of falling interest rates price falls initially and then steadies. correct?

Wasnt the question about interest rates going UP?

Hmm I recall if was falling interest rates maybe different versions of the exam?

I don’t know about any question, but I do know that the price of an IO rises initially as interest rates rise, then falls as rates continue to rise.

^I could be wrong of course, but thats what I think the question was asking. Maybe Im remembering incorrectly.

caspian Wrote: ------------------------------------------------------- > ^I could be wrong of course, but thats what I > think the question was asking. Maybe Im > remembering incorrectly. I am with you caspian.

LongOnCFA Wrote: ------------------------------------------------------- > price goes up with interest rates initially then > go down as interest rates keeps rising. ^^^This was the correct answer.

Damn, I put that it continues to rise as rates rise. Why does the value begin to fall?

As the interest rates rise the value of each cash flow is discounted at a higher rate…there is a tipping point.

ontheuptick Wrote: ------------------------------------------------------- > LongOnCFA Wrote: > -------------------------------------------------- > ----- > > price goes up with interest rates initially > then > > go down as interest rates keeps rising. > > > ^^^This was the correct answer. agreed.

really, i thought they go down as interest rates go down (principal repaid, therefore less interest) and up as interest rates go up…

Yeah I said that the interest rates go down and then as they keep going down there is prepayment burnout. Must have been different exam versions. I was like 99% on that one.

^^ That’s what I had too. They go down along with interest rates and then this effect wears out.

can we discuss specific Qs?..

I thought they were testing prepayment burnout here - or that ios decrease as interest rates decrease, and then decrease less as interest rates decrease more makes sense to me

look in your cfai text ‘fixed income’, prices rise but do eventually fall as the opportunity cost flies high(think of discounting at a much higher rate - it eventually gets to the point where it would’ve been better to sell a long time ago and buy a t-bill now at a much higher rate), there’s a nice chart in there.

I dont remember what was it the question asked about. Is this the one with a choice containing “IO value is positively related to mortgage rate” ?