medium · Asset-Backed Securities asset-nuances
An investor purchases a 'guaranteed' SBA 7(a) pool certificate at a price of 108 (a 8 point premium).
If the CPR spikes from 10% to 30%, what is the primary risk to the investor's total return?
- Liquidity risk, because the SBA will stop making interest payments during high prepay periods.
- Credit default risk, as high prepayments signal borrower distress.
- Premium erosion, as the 8-point premium is amortized over a much shorter time frame.
- Extension risk, as borrowers are unable to refinance in a high-rate environment.
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