1) Suppose that a pass-through security is issued at par. a) Explain brie?y what will happen to the value of the pass-through if market interest rates rise. Make sure you explain the direct (discount rate) effect and the indirect (prepayment rate) effect. What is the total impact on the security?s value? b) What will happen to the value of the pass-through if market interest rates fall? Once again, explain both the direct and indirect effects, along with the total effect.
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