medium · Asset-Backed Securities
An ABS practitioner is calculating the 'Weighted Average Life' (WAL) of a sequential-pay auto bond.
If the pool experiences a sudden spike in prepayments (acceleration), what is the most likely outcome for the Class A-1 bond and the Class B (subordinate) bond?
- Both tranches' WALs shorten in lockstep with the acceleration
- Class A-1 WAL shortens; Class B WAL is unaffected until A-1 is retired
- Class A-1 WAL shortens sharply while Class B's WAL extends out further
- Class A-1 WAL extends further out while Class B's WAL shortens instead
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