Credit card receivable-backed securities, Financial Management

For holders of CARDS, the interest is paid monthly and the principal is not amortized. The principal payments made by credit card borrowers are retained by the trustee for a specific period known as lock-out period or revolving period to be reinvested in additional receivables. The lock-out period varies from 18 months to 10 years.

The period after the lock-out period during which the principal is paid to investors is called principal-amortization period. The different structures used in amortization of credit card receivables are: (i) the pass-through structure, (ii) the controlled-amortization structure, and (iii) the bullet-payment structure. In the first case, the principal cash flows from the credit card accounts are paid to the security holders on a pro rata basis.

In the second case, a predetermined principal amount is set at a very low level so that the obligations are met even under certain inadvertent conditions. The investor is paid the predetermined principal amount or the pro rata amount, whichever is less.

In the third case, the investor receives the full amount at one time. But there is no guarantee that the amount will be paid in full. Some portion of principal is deposited monthly into an account by the trustee. The account will generate interest to make periodic interest payments and will accumulate the principal to be repaid in lump sum.

There may be situations under which the amortization of principal has to be done earlier before the completion of the lock-in period. In such situations, provisions that are made are referred to as "early amortization or rapid amortization". The primary purpose of this provision is to safeguard the credit quality of the issue. When this early amortization provision is activated, the cash flows will be altered. The situations under which this may occur are: (a) the default of the servicing party; (b) inability of the trust to generate income to pay for the coupon and the servicing fee; (c) decline in credit support below a particular level; and (d) violation of the agreements by the issuer regarding pooling and servicing.

Posted Date: 9/8/2012 9:13:45 AM | Location : United States







Related Discussions:- Credit card receivable-backed securities, Assignment Help, Ask Question on Credit card receivable-backed securities, Get Answer, Expert's Help, Credit card receivable-backed securities Discussions

Write discussion on Credit card receivable-backed securities
Your posts are moderated
Related Questions
Q. What is the importance of investigation of incidents? 1. Incident investigation is the process of identifying the underlying causes of incidents and implementing steps to pr

Does high operating leverage always mean high business risk?  Explain. High operating leverage doesn't always mean high business risk.  If the company's sales are quite steady

You are considering starting a walk-in-clinic. Your financial projections for the first year of operation are as follows: Revenues (10,000 visits) $400,000 Wages and benefits $220,

Expalin the term Company Objectives Financial management is anxious with making decisions about the provision and use of a firm's finances. A rational method to decision-making

How can we measure Total return- Measuring the Rate of Return Total return can be defined as: Total returns = (Cash payment received + Price change over the period) / Purcha

Q. What is Percentage of Sales Method? Percentage of Sales Method: - Under this process certain key ratios based on past year's information are established. These ratios is abl

Account balance - Inherent risk At account balance / class of transaction level Balances susceptible to misstatement. History of errors. Complexity of transac

Explain Zero coupon bonds The bonds that are sold at a discount from face value and do not pay any coupon interest over their life are known as Zero coupon bonds. At maturity t

Consider that you are deciding whether to undertake one of two projects. Project A involves buying expensive machinery which will produce a better product at a lower cost. The mach

I need assistance on Cost of preference share capital in financial management? Can someone help me to solve this proble with example It's Urgent!!!!!!!