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If markets interest rates miss considerably, property owners will re-finance the mortgage loans and you will pay back its old fund prior to when questioned
I When the rates of interest shed, property owners often re-finance their mortgage loans, increasing prepayment pricing towards the CMOsII In the event the rates of interest increase, property owners commonly refinance their mortgages, growing prepayment prices on the CMOsIII When the rates lose, the marketplace worth of CMO tranches usually decreaseIV When the rates miss, the business property value the CMO tranches increases
Hence, the new prepayment speed to own CMO proprietors increases. Additionally, while the rates get rid of, the value of the fresh fixed-income stream gotten regarding the individuals mortgage loans increases (because these old mortgage loans are providing a top than business rate out of come back), and so the market value of the defense increases.
We Whenever interest rates go up, prepayment pricing riseII When rates go up, prepayment cost fallIII Whenever interest levels slide, prepayment prices riseIV Whenever interest rates slide, prepayment cost slip