medium · Asset-Backed Securities tranching

If prepayments accelerate beyond the 'target' speed, where is the excess principal typically redirected?

1. To a companion or support tranche, which absorbs the excess principal to keep the TAC on its targeted schedule.
2. To the residual holder, since excess principal collected early is considered a form of excess spread.
3. To the senior-most tranche in the trust's next issued series, in order to maintain the master trust's invested amount.
4. It is held in a segregated reserve account to be used later if prepayments subsequently slow down, creating extension risk.

Sign up free to see the explanation and track your rank →