hard · Asset-Backed Securities
An investor is comparing two ABS tranches: one with a Nominal Spread of +150 bp and one with a Z-spread of +165 bp. Both are priced at par.
What does the 15 bp difference between the Z-spread and Nominal Spread primarily reflect?
- The value of the borrower's embedded prepayment option, i.e., the loan's effective callability.
- The liquidity premium investors require for holding an amortizing, less liquid structured asset.
- The difference between the bond's realized internal rate of return and its stated market coupon, all else equal.
- The cost of the spot rate curve's shape (upward sloping) relative to a single-point benchmark yield.
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