Correct answer: B

For pass-through MBS pools, prepayment behavior creates negative convexity at low yields because borrowers are more likely to refinance when rates fall. However, duration does not become negative; it generally remains positive, though it may decline as yields fall.

Why the other choices are true:

• A: Effective duration/convexity are based on re-pricing under different rate scenarios, because prepayments make closed-form analytical solutions unavailable.
• C: At low yields, faster prepayments make the price-yield relationship bend downward, so convexity becomes negative.
• D: When market yields fall, it is reasonable to assume a higher PSA because prepayments tend to accelerate.

So the false statement is B.