CFA Level I · CFA Level I Exam · Fixed-Income Securitization
A commercial mortgage-backed security (CMBS) investor is concerned about early repayment of the underlying loans. Which feature of CMBS loans most likely provides the greatest protection against prepayment risk?
Call protection through prepayment lockouts, penalties and defeasance gives CMBS investors the greatest protection against prepayment risk. Commercial loans are usually non-recourse, and a long amortization schedule does not stop borrowers from repaying early.
- ACall protection through defeasance and prepayment lockoutsCorrect
- BFull recourse to the borrower's other assets
- CAmortization of the loans over 30 years
Explanation
Commercial loans typically carry prepayment lockouts, penalties, or defeasance, giving strong call protection at the loan level. Commercial mortgages are usually non-recourse, so recourse is not the protection, and long amortization does not prevent prepayment.
Did you get it right without looking?
One question tells you little. A timed set on Fixed-Income Securitization shows your real accuracy, how long you take and where you lose marks.
More Fixed-Income Securitization questions
- In a jurisdiction where residential mortgages are non-recourse, a borrower defaults on a loan with an outstanding balance of 300,000 secured…
- In an ABS structure, the originator sells receivables to a special purpose entity that issues a senior tranche and a subordinated tranche. L…
- A securitization has a senior tranche, a mezzanine tranche and a subordinated tranche. Losses on the collateral are allocated first to the s…
- A lender grants a residential mortgage loan in which the borrower makes level payments that cover interest and principal so that the balance…
- In a sequential-pay CMO with Tranches A, B and C, all principal payments, including prepayments, are first directed to Tranche A. Which tran…
- Which of the following is the most likely benefit to the economy of the securitization market?