medium · Asset-Backed Securities tranching
In a 'second-priority principal' waterfall structure, how does excess spread trapping physically increase the overcollateralization amount?
- By depositing extra cash directly into the trustee's dedicated reserve account each period.
- By raising the interest rate charged on the loans held by the underlying borrowers.
- By having the trust issue new subordinate bonds and delivering them to the originator.
- By using excess interest to pay down bond principal faster than the collateral amortizes.
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