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Answer: b) Cash flows do not incorporate prepayments
**Answer: B) Cash flows do not incorporate prepayments** This is the **EXCEPT** choice because a static cash flow model typically *does* incorporate prepayments, but only by assuming a fixed prepayment pattern. The model is called *static* because those prepayment assumptions do not change dynamically with interest rates. The other choices are genuine weaknesses of static cash flow MBS analysis: - It is **not really a pricing model** in a dynamic sense. - It can generate **misleading price-yield and duration-yield curves** because cash flows are held fixed. - It **does not capture negative convexity**, since it does not let prepayments respond to changing rates.
Author: Manit Arora
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Q-53.2 Each of the following is a weakness of STATIC CASH FLOW MBS EXCEPT for:
A
a) Not really a pricing model
B
b) Cash flows do not incorporate prepayments
C
c) Misleading price-yield and duration-yield curves
D
d) Does not capture negative convexity
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