medium · Asset-Backed Securities waterfalls

A Home-Equity ABS transaction reaches its 'Step-Down Date' at Month 36.

If all performance triggers are clear and the senior bonds have paid down sufficiently, what happens to the prepayment cash flows?

  1. A portion of the prepayments is allocated 'pro-rata' to the subordinate bonds, releasing cash to junior investors.
  2. Prepayments are used to raise the 'overcollateralization' (OC) target by a set basis-point amount annually.
  3. The senior bonds begin receiving 100% of both scheduled principal and interest until fully retired at their par value.
  4. All prepayments are diverted into a segregated 'locked reserve' account solely to protect against future collateral defaults.

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

More Asset-Backed Securities waterfalls practice

KomFi: Test Prep Made Easy

KomFi: Test Prep Made Easy — free adaptive practice for GMAT, GRE, SAT, ACT, National Real Estate Exam, Investment Banking, and finance with full explanations.

KomFi Academy is free GMAT prep and personalized GMAT help built as a training platform: 92,240+ practice questions, 30,500+ flashcards, on-demand video lectures, podcasts, and 4K slide decks. Flagship tracks: Free GMAT Prep, Free GMAT Resources, National Real Estate Exam Prep, Investment Banking Prep, Finance Prep, GRE, SAT, ACT, LSAT, MCAT, Financial Accounting, Private Equity, Private Credit, and Quantitative Finance.

Free GMAT Prep & Personalized GMAT Help

What's inside

Topics

View pricing · Read testimonials