medium · Asset-Backed Securities collateral
A $100M bond is purchased at a discount price of 97. If the expected WAL is 4 years, and the bond prepays faster than expected, reducing the WAL to 2.5 years, what is the impact on the investor's yield?
- The yield increases because the $3 discount is realized over a shorter period.
- Convexity ties yield to rates; faster paydown aids discount-bond return.
- Interest stops sooner, yet the accelerated gain on a discount bond outweighs lost coupon income.
- Yield-to-WAL reflects coupon income plus amortization of the discount or premium over time.
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