Financial Risk Manager Part 1

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Explanation:

An IO strip receives only interest payments. When prepayments speed up:

So A is false.

Why the others are true:

B is true: A PO strip benefits from faster principal return, so its value generally increases as PSA increases.
C is true: When the IO and PO strips are combined, their value-weighted duration relationship is consistent with the duration of the original pass-through security.
D is true: Because IOs lose value when rates fall and prepayments rise, their duration is often negative, sometimes strongly so.

Hence, the exception is A.

Explanation:

An IO strip receives only interest payments. When prepayments speed up:

So A is false.

Why the others are true:

B is true: A PO strip benefits from faster principal return, so its value generally increases as PSA increases.
C is true: When the IO and PO strips are combined, their value-weighted duration relationship is consistent with the duration of the original pass-through security.
D is true: Because IOs lose value when rates fall and prepayments rise, their duration is often negative, sometimes strongly so.

Hence, the exception is A.

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MManit

Last updated: April 18, 2026 at 11:32

As the PSA increases (e.g., 100% to 300%), the value of the interest-only (IO) bond will increase

50.0%

As the PSA increases (e.g., 100% to 300%), the value of the principal-only (PO) bond will increase

25.0%

The weighted average sum of the durations of the IO and PO strips must equal the 12.0 duration of the original pass through.

12.5%

The duration of the IO strip is likely to be negative, even substantially negative

12.5%