Shifting Interest Mechanism - Page 273 0 Schweser

“To maintain subirdinate interest at a desirable level, prepayments are allocated among the senior tranches at a relatively higher proportion in the early years. The key point to remember is that the shifting interest mechanism reduces credit risk of the senior tranches, but the trade off is greater prepayment risk for the senior tranches”

Question: Why would greater prepayments from the junior tranches towards the senior tranches improve the senior tranche’s credit worhiness? If more is given in the early years and is gradually reduces, they will be faced with greater credit risk in the latter stages of its life. Why is it that faster prepayments result in better credit?

Because there is less to pay back. I’d rather have someone owe me $10 than $100, all else equal.