Portfolio has MBS position - interest rate risk

CFA Level III
#1

Interest rate going down : Contigent claim risk

How about rising interest rate? Will slower prepayment reduce portfolio cash flow?

#2

Yes.

#3

Thanks. In short, as long as interest rate is not flat, the MBS’s position will have interest rate risk.

#4

As it is for every other bond…?!

#5

For other bonds, interest rate down is positve. (Asset only)

#6

But focusing on the liability side… :slight_smile: So, it depends on the case!