When compared to a Treasury security, the key durations of a mortgage security are:
A) more in number and can only be positive while those of Treasury securities can be negative. B) more in number and can be negative or positive while those of Treasury securities can only be positive. C) fewer in number can be positive or negative while those of Treasury securities can only be positive.
For a mortgage security trading at par and a hedge formed with a short position in a Treasury futures position that is designed to maintain a stable value, the hedge would still be effective if:
A) there is a 100 basis point decrease in yield. B) there is a 75 basis point decrease in yield. C) there is a 100 basis point increase in yield.
Trading at par - MBS will behave like a normal bond. Prepayment option at the money…hedged formed against fall in int rate…would still be effective for increase in int rate so again ©
Bonds below par…if YTM > Coupon. Likewise bonds above par when YTM < Coupon
when MBS trading below par -> YTM > Coupon…Prepayment option is out of money keeping other things constant. MBS behave like a pc bond…
MBS trading at par…YTM = coupon, if int rate increase from here say 100 bps…option will be move away from being at the money…So MBS will behave like a normal bond…Long MBS & short futures will offset each other.
BTN i dont why am i writing like this :-/
The duration of MBS could be negative? Didn’t notice it before. It makes sense to me.
Correct ans is B and C. I did C & C like you guys.