medium · Asset-Backed Securities
An investor is comparing two tranches with the same 5-year final maturity. Tranche X is a bullet bond, and Tranche Y is a level-pay amortizing bond.
Which has the shorter WAL?
- Tranche Y, because principal is returned periodically throughout the 5 years.
- It depends on the coupon rate of the bonds.
- Tranche X, because the entire principal is returned at once.
- They have the same WAL because their final maturities are identical.
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