The graph below represents the estimated price$/$yield

relationship for two mortgage$-$backed securities$,$ taking into

account expected prepayment and default behavior. Both

securities are derivatives of a pool of underlying fixed$-$rate

mortgages, each with a final maturity of $15$ years and that

can be prepaid without penalty at any time.

Question:

A$.$ Which is the Interest Only $($IO$)?$

a$.$ MBS $1$

b$.$ MBS $2$

B$.$ Which of these securities has a negative effective duration when interest rate is at $6\%?$

a$.$ MBS $1$

b$.$ MBS $2$

C$.$ Which of these securities has a negative convexity when interest rate is at $6\%?$