medium · Asset-Backed Securities
In the context of CMBS Interest-Only (IO) tranches, how does 'Defeasance' typically affect the value of the IO bond?
- It destroys value, since the loan is paid off and its notional balance disappears.
- It has no effect at all, since IO strips only track the notional principal balance.
- It decreases the bond's value because prevailing Treasury yields are below the original coupon.
- It increases value by eliminating credit risk while maintaining the interest-coupon stream.
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