R50: Valuating MBS and ABS

CFA Level II Fixed Income
#1

Could someone explain the logic behind the following statements? (Thanks in advance)

Q10)

Statement 1: The greater the duration of a tranche in a sequential-pay CMO structure, the more sensitive its value to changes in the OAS.

Statement 2: All Other things remaining the same, a tranche with a greater duration should have a higher Z Spread (not higher OAS) and option cost.

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My Thought Process -

  1. As for the first statement, I thought that greater duration means it is more sensitive to interest rate movements. So, I thought it makes sense that the changes in the OAS would be more sensitive to higher duration.

  2. Again, higher duration means higher interest rate risk exposure. But, not sure why it should have a higher z-sread and not higher OAS, and higher option cost.

#2

is this a question or answer statement? are they both correct?