medium · Asset-Backed Securities asset-nuances

If interest rates drop and the CPR accelerates to 20%, shortening the WAL to 2.5 years, how does this affect the investor's yield?

1. The yield increases because the investor receives their principal back sooner to reinvest at higher rates.
2. The yield is unchanged because the coupon rate on the MBS is fixed.
3. The yield decreases because the 3-point premium must be amortized over a shorter period.
4. The yield increases because faster prepayments reduce the duration risk.

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