Market valuation of pass-through securities is correct

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Reference no: EM131952829

A life insurance company has a very negative duration gap between assets and liabilities, and would like to invest in some mortgage-backed securities to hedge the interest rate risk. Which one of the following securities issued from the same pool of mortgage loans would offer the LEAST hedging benefit?

a. IO strip in a CMO

b. PO strip in a CMO

c. The most senior tranche (tranche A) in a CMO

d. Mortgage-backed bonds

e. The pass-through securities

2. Which one of the following statements about the refinancing on the market valuation of pass-through securities is correct?

a. It has bad news effect as, everything else equal, the present value of future cash flows decreases due to higher interest rate.

b. It has good news effect as, everything else equal, the present value of future cash flows increases due to faster principal repayments.

c. It has good news effect as, everything else equal, the present value of future cash flows increases due to more interest payments in absolute terms.

d. It has good news effect as, everything else equal, the present value of future cash flows increases due to more reinvestment income.

e. It has neither good news nor bad news effect.

Reference no: EM131952829

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