What does Wolfson mean when he says: "You get paid in yield to take on negative convexity"?

What will be an ideal response?


Negative convexity has the same impact on the price performance of a RMBS as it does on the performance of a callable bond. When interest rates decline, a bond with an embedded call option, which is what a RMBS is, will not perform as well as an option-free bond. Thus, Wolfson is pointing out that investors will require higher yields for such investments or equivalently: "You get paid in yield to take on negative convexity."

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