medium · Asset-Backed Securities abs-core
An investor is considering a premium-priced ABS bond with a 'Cleanup Call' exercisable at 10.0%.
How does the exercise of this call typically impact the investor's yield compared to the Yield-to-Maturity (YTM)?
- The yield will increase because the investor receives their principal back sooner and can reinvest it at higher current market rates.
- The yield will decrease because the premium is amortized over a shorter-than-expected period when the call is exercised.
- The yield will remain identical to the YTM because cleanup calls are only exercised when the bond is already trading at par.
- The yield will fluctuate based on the LIBOR/SOFR spread at the time of the call, as cleanup calls are typically refinanced with new debt.
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