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.
Equity exhibits a negative convexity
. In Figure 6, equity is interest rate risk immune at a 10 percent interest rate.
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.
is the factor that generally concerns mortgage bankers.
* Mitigation of negative duration and (often) negative convexity
Because 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.