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I'm reading a book that states that PO mortgage bonds go up when interest rates go down as the prepayment happens faster.

I'm confused whether prices go up on PO bonds or yields go up?

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Prices go up. For 2 reasons a) just like any bond, prices go up when rates go down and b) faster prepayments are expected , which means the maturity of the bond becomes earlier than previously expected. Zero coupon bonds with earlier maturities have higher prices.

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  • $\begingroup$ so is it fair to say that yields go down for PO mortgages when interest rates go down? $\endgroup$
    – nsivakr
    Commented Mar 8, 2022 at 14:56
  • $\begingroup$ Yes that is fair $\endgroup$
    – dm63
    Commented Mar 8, 2022 at 22:51

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