Why do garbage class bonds often have a negative duration?
A)The value of the returns in this bond class increases when interest rates increase.
B)It gives the rights to collateralization.
C)Bond values fall with interest rate increases.
D)It gives rights to reinvestment income on the cash flows in the CMO trust.

Question

Quizplus · Accepted Answer

Garbage class bonds, often associated with collateralized mortgage obligations (CMOs), can have a negative duration because their value increases when interest rates rise, contrary to typical bonds. This is due to the structure of these bonds, where rising rates can lead to faster prepayments and higher reinvestment rates.

Why Do Garbage Class Bonds Often Have a Negative Duration