medium · Asset-Backed Securities
A 'Clean-up Call' is typically exercisable when the pool balance falls below 10%.
If a bond is currently trading at a significant discount to par (e.g., 85 cents), how does the exercise of this call affect the investor's realized yield?
- It has no real effect on realized yield since the call price is contractually fixed at par regardless of market pricing
- It meaningfully decreases the investor's realized yield because all remaining scheduled interest coupons are permanently forfeited
- It results in a modest principal loss for the investor since the call is effectively a forced sale once the 10 percent threshold is met
- It significantly increases the yield because the principal is returned at par (100 cents) earlier than the scheduled maturity
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