“Cahs flow duration measure is more reliable than Monte Carlo simulation beause the formere uses static principal prepayment assumptions to determine the bond values used to calculate the effective duration” Is this statment about the reliability of the cash folw duration measure most likely correct? A.Yes B.No, because the pricing series data used to calculate cash flow duration may not be accurate. C.No, because cash flow duration can only be used when cash flows are not affected by changes in intrest rates (i.e. non callable bonds) D.No, because cash flow duration is based on naive assumptions of how prepayment rates change over the lofe of an MBS for given intrest rate changes. I think D is the right answer. Is it correct? Or should it be B?
D is correct. This, if I recall correctly, is right out of the book.
D is correct cash flow duration assumes that one prepayment rate will apply over the life of an MBS for whatever change in interest is assumed.