Investors in floating-rate home equity ABS should educate themselves on the changeable intricacies of the available funds cap (AFC) to which the coupons on these bonds are subject, according to a report from Banc of America Securities.

In order to hedge against increased exposure to AFC risk resulting from a greater percentage of fixed-rate bonds, most recent home equity securitizations contain imbedded interest rate corridors, or yield maintenance agreements, to guard against net WAC cap shortfalls. Such a mechanism is basically a cap contract whereby the counterparty's liabilities are limited by a maximum interest rate.

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