CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features
A credit card receivables ABS is in its lockout (revolving) period. During this period, principal payments collected from cardholders are most likely:
During the lockout period, principal collected from cardholders is used to buy new receivables so the pool stays constant in size. Investors receive only interest then. Principal is distributed to investors only once the amortization period begins.
- Aused to purchase new receivables to maintain the size of the poolCorrect
- Bpassed through to investors as scheduled principal repayments
- Cheld in a reserve account until the legal final maturity date
Explanation
Credit card loans have no fixed amortization schedule, so ABS use a lockout period in which principal collections buy new receivables. Investors receive interest only. Principal is passed through only after the lockout ends, in the amortization period.
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