Which type of asset-backed security is not affected by prepayment risk?
A) auto loan aBS
B) residential MBS
C) Credit card receivable aBS

Question

Quizplus · Accepted Answer

Credit card receivable ABS are not affected by prepayment risk because the borrower cannot prepay the balance on their credit card. As long as the borrower makes minimum monthly payments, the underlying assets will continue to generate cash flows for the ABS investors. Auto loan and residential MBS are affected by prepayment risk because the borrowers can choose to pay off their loans early, which would result in a loss of future cash flows for the ABS investors.

Which Type of Asset-Backed Security Is Not Affected by Prepayment