Answer the questions below.

a. Why do holders of mortgage-backed securities (MBS) suffer more when interest rates in the economy fall so as to trigger mortgage refinancing?

b. Why do MBS lose more value relative to a plain bond when interest rates fall? What is this effect called?

c. Why and how does mortgage refinancing disrupt the duration of an MBS investor’s portfolio?

d. What would investors of, say, pension funds which have future liabilities to fund do if refinancing took place?