hard · Asset-Backed Securities
A CMBS IO (Interest-Only) investor is analyzing a pool where a significant loan ($50 million) has just been 'Defeased.'
What is the primary impact of this event on the IO cash flows?
- The IO cash flows for that loan are terminated immediately, as defeasance is treated as a prepayment at par.
- The IO coupon increases because the risk profile of the underlying collateral has improved to Treasury quality.
- The IO cash flows continue unchanged, as the loan remains in the pool at the same coupon, now backed by Treasuries.
- The IO value decreases because the likelihood of a future yield maintenance penalty is eliminated.
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