Zestt

I haven't done this problem yet, but looking at it, it seems that they are talking about a relative increase in value in swapping from corporates to MBS, not just the impact on MBS alone.... There are two effects at work here: 1) interest rates decreasing and 2) increase in volatility. For corporates, effect #1 would lead to a price increase - which would be larger than the MBS would experience due to the negative convexity of the MBS - but the impact of effect #2 would probably hurt corporates more than the MBS as long as the interest rate was still above the point where people would refinance.