hard · Asset-Backed Securities
A bond investor observes a prime auto ABS pool with a current weighted average life (WAL) of 2.5 years under a 1.3% ABS prepayment assumption.
If used-car prices surge and consumers trade in vehicles faster, increasing prepayments to 1.8% ABS, what is the likely impact on the bond's WAL?
- The WAL will remain constant because auto loans are fixed-rate.
- The WAL will extend due to higher loan turnover.
- The WAL will shorten, but only if the bond's coupon is also floating-rate.
- The WAL will shorten significantly.
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