medium · Asset-Backed Securities asset-nuances
A CMBS Interest-Only (IO) tranche is characterized by having a Notional Balance.
If the underlying pool experiences high levels of early defaults, what is the likely impact on the IO investor?
- The IO investor benefits from the pool's higher rate
- The IO cash flows decrease because the notional balance is reduced
- The IO cash flows rise as the deal's average life is extended
- The IO investor is unaffected since no principal is ever received by them
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