medium · Asset-Backed Securities
A Home-Equity ABS transaction reaches its 'Step-Down Date' at Month 36.
If all performance triggers are clear and the senior bonds have paid down sufficiently, what happens to the prepayment cash flows?
- A portion of the prepayments is allocated 'pro-rata' to the subordinate bonds, releasing cash to junior investors.
- Prepayments are used to raise the 'overcollateralization' (OC) target by a set basis-point amount annually.
- The senior bonds begin receiving 100% of both scheduled principal and interest until fully retired at their par value.
- All prepayments are diverted into a segregated 'locked reserve' account solely to protect against future collateral defaults.
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