Answer: Due to prepayments, at low yields we expect negative duration

**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**.

Author: Manit Arora