easy · Asset-Backed Securities
In the later years of a shifting interest deal (e.g., year 7+), the senior prepayment percentage often bottoms out at around 20%. Why not 0%?
- Because the subordinate bondholders are prohibited by law from receiving more than 80% of any prepayment.
- Because the residual holder receives the other 80% once the deal reaches this stage.
- To ensure that senior bonds continue to receive some portion of prepayments and eventually retire completely.
- To keep the senior bonds' WAL from extending beyond the final legal maturity date.
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