CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features
An auto loan asset-backed security is backed by a pool of loans that borrowers can repay early. Which feature of the cash flows is most likely to cause the ABS to experience prepayments?
Auto loan ABS prepayments mostly arise when borrowers sell or trade in the vehicle, or refinance the loan. Floating-rate resets do not drive prepayment, and a revolving period is a credit card ABS feature, not an auto loan one.
- ABorrowers selling or trading in the vehicle, or refinancing the loanCorrect
- BInterest payments that reset to a floating index
- CA revolving period during which principal is reinvested
Explanation
Auto loan borrowers prepay mainly when they sell or trade in the car, or when the vehicle is lost, or they refinance. Floating-rate resets and revolving periods are not the source of auto loan prepayments; revolving periods apply to credit card ABS.
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