hard · Asset-Backed Securities
An investor holds a CMBS Interest-Only (IO) tranche. Which of the following events would most likely cause an immediate impairment to the IO cash flows?
- A borrower exercises a defeasance option on a high-coupon loan.
- Market interest rates rise by 100 basis points, lowering the present value of future coupons.
- A large loan in the pool experiences a term default and is accelerated by the special servicer.
- The weighted average life (WAL) of the senior tranches extends due to a slowdown in prepayments.
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