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Question
Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments?
A. Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect).
B. Low yields lead to faster prepayment of the mortgage pool's principal (good news effect).
C. With early prepayments comes fewer interest payments in absolute terms (bad news effect).
D. Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect).
E. Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).
Answer
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