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Consider a REMIC that has only two tranches, interest only (IO) and principle only (PO). Briefly describe prepayment and extension risk? What effect will a
Consider a REMIC that has only two tranches, interest only (IO) and principle only (PO). Briefly describe prepayment and extension risk? What effect will a rise in society-wide interest rates have on the periodic cash flows to the PO tranche holder? The IO tranche holder? How would these impacts on cash flows affect the value of IO and PO strips if society-wide interest mortgage interest rates increase? Decrease?
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