A PO Is a "Principal Only" MBS and an IO

question 8

Multiple Choice

A PO is a "principal only" MBS and an IO is an "interest only" MBS. As prepayments increase which of the following happens.

• A) Both the PO and IO become more valuable
• B) The PO becomes more valuable and the IO becomes less valuable
• C) The PO becomes less valuable and the IO becomes more valuable
• D) Both the PO and IO become less valuable

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Definitions:

Inverse

The opposite or reverse relationship, where an increase in one variable leads to a decrease in another, and vice versa.

Price Floors

A minimum price set by the government for certain goods and services, intended to ensure fair conditions and prevent market price from falling below a certain level.

Surpluses

Occurs when the supply of a particular good or service exceeds its demand, often leading to a decrease in prices.

Shortages

Shortages occur when the demand for a product exceeds the supply available at a particular price, often leading to higher prices and waiting times.