CFA Level I · CFA Level I Exam · Mortgage-Backed Security (MBS) Instrument and Market Features
In a CMBS structure, an investor holding a bond class that is protected from prepayment risk by the structure because of loan-level restrictions is most likely benefiting from:
Defeasance is the loan-level feature that best protects CMBS investors from prepayment. The borrower substitutes government securities whose cash flows match the scheduled loan payments, so bondholders keep receiving expected cash flows even though the property is released from the lien.
- Aa sequential-pay structure between tranches
- Bdefeasance of the underlying commercial loansCorrect
- Ca planned amortization class collateral
Explanation
Defeasance replaces the property collateral with a portfolio of government securities that continues to fund the loan payments, so the cash flows to CMBS investors are preserved. Sequential-pay structures address credit and maturity allocation, and PAC collateral is a residential concept.
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