The Discount Effect and the Prepayment Effect Are Negatively Correlated

question 72

True/False

The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.

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Definitions:

Long-Run Supply

The total quantity of goods or services that a market can produce and provide over a long period, considering all relevant input adjustments.

Lowest Price

The minimum cost at which a product or service is offered in the market.

Short Run

A period of time in economics during which at least one input, usually capital, is fixed and cannot be changed.

Efficient Output

The level of production at which a company or economy can produce the maximum amount of goods and services with the least waste of resources.