Explanation:
At low yields, the pass-through can trade above par because some homeowners fail to prepay even when it is financially optimal to do so. At high yields, the pass-through can still price above a non-prepayable counterpart because some homeowners do prepay even when it is not financially optimal, since refinancing decisions depend on more than just the current interest rate level.
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Question 49.3 What explains, respectively, the observations that (i) at LOW YIELDS, a mortgage pass-through prices ABOVE PAR and (ii) at HIGH YIELDS, a mortgage pass-through prices ABOVE its non-prepayable counterpart loan?
A
Many prepay when financially optimal; Many do not prepay when not financially optimal.
B
Many prepay when financially optimal; Some do prepay when not financially optimal.
C
Some do not prepay when financially optimal; Some do prepay when not financially optimal.
D
Some do not prepay when financially optimal; Some do prepay when not financially optimal.
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