On an absolute valuation basis, tranches trading at a premium will see gains when the assumed prepayment rate decreases?
Why is this? Can someone explain?
On an absolute valuation basis, tranches trading at a premium will see gains when the assumed prepayment rate decreases?
Why is this? Can someone explain?
This has been discussed several times here.
If a tranche is trading at a premium, its coupon is higher than its YTM. If prepayments slow, it will receive that higher coupon for longer; thus, its price will increase.