Marg Kingston and Albert Loo, both Level II CFA candidates, are discussing asset-backed securities . Kingston stares that prepayment risk is more of a concern for an investor in a traditional mortgage-backed security than an autO loan asset-backed security (auto loan ABS) because auto loans typically have smaller loan balances and greater depreciation than mortgages. Loo adds that there are two other reasons-the underlying assets are less liquid in an auto loan ABS and often the loans are initially made at below-market rates as parr of sales promotions. With regard to the overall statements made by Loo and Kingston, these are most likely: A. both correct. B. correct in one instance, but incorrect in the other. C. both incorrect.
Kingston is right, no one prepays auto loans. Loo hmmm the first part I don’t think is true, cars being less liquid than a house, but the second part is definitely true, because auto loans are usually at 1% or interest free. I hate these ones where they give half truths.
I’ll say B but probably A is right because the CFA hates me.
Did I have the right logic ?
“the underlying assets are less liquid in an auto loan”
Must be the reason why, everything else looks correct to me.