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Explanation:
A PO strip receives only principal payments, so it behaves much like a deep-discount, zero-coupon-like bond. Its value rises when rates fall because principal is returned sooner and discounted less heavily. POs are typically sold at a discount because they do not receive interest payments. However, negative duration is characteristic of IO strips, not PO strips. Therefore the false statement is that POs can have negative duration.
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A
a) PO behaves like a zero coupon bond
B
b) As rates fall, price of PO increases dramatically
C
c) The POs sell at a discount
D
d) The POs can have negative duration