medium · Asset-Backed Securities
If a CMBS Interest-Only (IO) tranche is valued based on a 'notional' balance, how does an increase in the underlying pool's default rate affect the IO investor?
- It increases the IO's value because defaults extend the life of the pool.
- It increases the yield because the investor receives higher 'default interest' penalties.
- It has no effect as IO tranches are only sensitive to voluntary prepayments.
- It decreases the IO's value because the notional balance declines faster.
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