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A binomial model or any other model that uses the backward induction method cannot be used to value a mortgage-backed security (MBS) because: A. the cash flows for an MBS only depend on the current rate, not the path that rates have followed. B. the cash flows for the MBS are dependent upon the path that interest rates follow. C. the prepayments occur linearly over the life of an interest rate trend (either up or down). D. interest rates are irrelevant to the value of a mortgage-backed security. |