can someone summarize the key points for the two securities.
PO strips have negative key rate duration for short & intermediate rates & positive for longer (>10y) rates (thus if short end of yield curve declines & long end is unchanged, PO value will decline despite positive effective duration) IO strips have positive key rate durations up to 10y, negative there after p.s. don’t ask me why, I gave up understanding it
yeah page 112 of volume 3 of schweser does a great little summary
tanyusha Wrote: ------------------------------------------------------- > PO strips have negative key rate duration for > short & intermediate rates & positive for longer > (>10y) rates (thus if short end of yield curve > declines & long end is unchanged, PO value will > decline despite positive effective duration) > > IO strips have positive key rate durations up to > 10y, negative there after > > p.s. don’t ask me why, I gave up understanding it Same here…just try to remember it.
PO: negative durations in early years (move in the direction of interest rates) Think of it this way: if you’re dealing with an MBS, the likelihood of the PO getting paid off when interest rates rise is unlikely. IO: positive durations (move opposite to interest rates) in early years - If rates go up, the value of these go down.