Which of the following is most accurate regarding the investment characteristics of a principal-only (PO) mortgage strip? A) The faster the prepayments the higher the investor’s return. B) The slower the prepayments the higher the investor’s return. C) The lower the coupon the higher the investor’s return.
A - in this case the value is based on the PV of the principal payments and if people pre-pay, you get your money sooner.
A
Gotta be A
yes its is. I got confused by the fact that principal-only (PO) mortgage strip are issued at a significant discount; the lower coupon will bring extra income (only when the prepayment is early). But here, we have an entry addressing prepayments.
IO will lose.
A!