If the Prepayment Schedule for a Mortgage Pool Increases from 50

question 61

Multiple Choice

If the prepayment schedule for a mortgage pool increases from 50 PSA to 100 PSA, the related interest-only strips will ________ in value and the related principal-only strips will ________ in value.

• A)decrease; decrease
• B)decrease; increase
• C)increase; decrease
• D)increase; increase
• E)remain constant; remain constant

Understand the impact of growth rates and required rates of return on stock valuation.

Apply practical knowledge in determining the maximum price to pay for a stock based on its expected dividends and selling price in the future.

Understand the goal of investors to maximize returns while minimizing risk.

Distinguish the long-term average returns on equity investments relative to other investments and inflation.

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Definitions:

Reserve Requirements

Regulations set by central banks determining the minimum amount of reserves that banks must hold against deposits, influencing the bank's ability to lend.

Money Supply

The total amount of monetary assets available in an economy at any specific time, including cash, bank deposits, and other liquid assets.

Deposit Expansion Multiplier

A ratio that explains the total increase in deposits within the banking system generated from an initial deposit, based on the reserve requirement ratio.

Open Market Securities

Financial instruments such as bonds or stocks that are traded freely on the open market and can be bought and sold by investors.