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:

Minimum Efficient Scale

The smallest level of production at which a firm can achieve the lowest long-run average total costs.

Constant Returns to Scale

A situation in which the proportionate increase in inputs leads to an equal proportionate increase in outputs, meaning costs and outputs scale equally as production expands.

Diseconomies of Scale

A situation where a business's cost per unit increases as it produces more items, due to inefficiencies that arise with scaling up production.

Plant Size

Refers to the physical capacity or output level of a manufacturing or production facility.