Why is the monthly payment rate an important measure to examine when considering investing in a credit card receivable-backed security?
What will be an ideal response?
It is important to look at the monthly payment rate so as to get a feel for how rapidly credit card borrowers are paying off their debt. More details are given below.
The concept of prepayments does not apply to credit card receivable-backed securities because there is no amortization schedule during the lockout period. Instead, for this sector of the asset-backed securities market, participants look at the monthly payment rate (MPR). This measure expresses the monthly payment (which includes finance charges collected and any principal) of a credit card receivable portfolio as a percentage of debt outstanding in the previous month. For example, suppose a $500 million credit card receivable portfolio in January realized $50 million of payments in February. The MPR would then be $50 million / $500 million = 0.10 or 10%.
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