Warning Signal: If the weighted average coupon promised to the ABS Tranches is less than the net portfolio yield, there is risk that tranches will not get paid off as promised. I DONT GET THIS! IF THE YIELD ON THE PORTFOLIO IS HIGHER THAN THE COUPON RATE, ISNT THAT SUPPOSED TO BE A GOOD THING? HENCE, IT SHOULD NOT INDICATE ANY WARNING SIGNAL… HOW DOES THE ABOVE APPLY EXACTLY? PLEASE EXPLAIN… THANKS !!
Check out Schweser’s errata page on their website: Dec 4, 2007 they changed this to read “If the wtd ave coupon promised to the ABS tranches is GREATER than the net portfolio yield…”