medium · Asset-Backed Securities asset-nuances
An investor is evaluating a CMBS Interest-Only (IO) tranche. The underlying pool features strong 'Defeasance' protection.
If interest rates rise significantly, which of the following best describes the likely impact on the IO investor?
- The IO cash flows will decrease because the 'Available Funds Cap' will trigger higher interest shortfalls.
- The IO's credit quality will deteriorate as rising rates lead to higher term defaults across the multifamily sector.
- The IO value is likely to be stable or increase as the probability of early voluntary prepayment (refinancing) drops.
- The IO tranche's value will decline sharply due to increased prepayment risk.
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