Appropriate valuation model for an ABS is dependent on whether that option is typically exercised. - credit card receivable backed ABS have no prepayment option, and therefore are not path dependent so use the Z spread as appropriate measure. I would say credit card receivables are path dependent. If rates fall, the minimum payment due would most likely fall, and borrowers would have excess cash to pay down principal. Why do they not take this into consideration?
in credit card, interest rates are locked. Now market is down and risk free rate is next to zero but have you called american express/discover/visa/MC to reduce your credit card’s interest rate?
credit card rates are variable rates, no? your second point is well documented.
just got by what the book says man. reality won’t be tested on this POS.
My credit card interest rate is still lie 17.5%. THEY’RE SCREWING US!! Thank goodness for fiscal responsibility
Another way to think about this is that even with fixed rate interest on credit cards…you can’t refinance to a lower rate (which would result in prepaying your balance)…and your balance is usually due within a month unless you want to pay interest on it anyways. With mortgages, you have a long term loan against a tangible asset (real estate). Refinancing is available. The path dependency lies in the fact that you can’t continuously refinance if rates keep going lower, and there is no threshold by which people decide to refinance over not refinance. (i.e. if rates fall from 5% to 3%, then people refinance, and if rates go from 3 to 2, people will have mainly already refinanced. however, if rates went from 10% to 2%, people will all refinance).