medium · Asset-Backed Securities asset-nuances
An analyst is evaluating a CMBS Interest-Only (IO) tranche. A large loan representing 15% of the pool balance is 'defeased'.
What is the most likely impact on the value of the IO tranche?
- Value increases because credit risk on that portion is eliminated while the interest stream continues.
- Value decreases because the discount rate for the IO must increase due to higher concentration in the remaining loans.
- Value decreases because the notional balance is reduced by the loan amount.
- Value remains unchanged because IO cash flows are deterministic in CMBS.
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