medium · Asset-Backed Securities asset-nuances

An investor holds a CMBS Interest-Only (IO) tranche. Which of the following events would most likely cause an immediate impairment to the IO cash flows?

  1. A borrower exercises a defeasance option on a high-coupon loan.
  2. Market interest rates rise by 100 basis points, lowering the present value of future coupons.
  3. A large loan in the pool experiences a term default and is accelerated by the special servicer.
  4. The weighted average life (WAL) of the senior tranches extends due to a slowdown in prepayments.

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