The Guidelines also propose to compute additional adjustments to reflect the
negative convexity as well as transaction costs and any relevant behavioural factors that may affect the modified duration of the instrument.
It has a similar maturity risk to the underlying mortgage but, because of its
negative convexity, has a much greater volatility of return as expected maturity ebbs and flows.
Callable bonds contain
negative convexity which may be defined as a characteristic of a bond, when the price appreciation is less than the price depreciation, for a large change in interest rates.
IOs exhibit "
negative convexity" and are considered a bearish investment.
A security that has
negative convexity rises at a lesser pace than the corresponding change in interest rates.
Convexity refers to the price/yield curve;
negative convexity means that the price/yield curve flattens as interest rates decline).
* Limited
negative convexity. The prepayment lockouts and/or yield-maintenance provisions on most conduit loans make prepayment less tied to interest rates than for residential mortgage loans.
Negative convexity is the factor that generally concerns mortgage bankers.
* Mitigation of negative duration and (often)
negative convexityBecause interest rates had been on a steady uptrend for years, pipeline fallout and
negative convexity were merely academic concepts.
While most may not be familiar with the term, there's hardly a mortgage banker in America who has not had sleepless nights worrying about mortgage banking's peculiar curse of
negative convexity. The rate of return on the servicing portfolio also possesses this feature.