hard · Asset-Backed Securities
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.
- The yield decreases due to the negative convexity inherent in all ABS.
- The yield decreases because interest is received for fewer years.
- The yield remains constant because the coupon rate is fixed.
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