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. Security Required in Bank Finance? 1) Hypothecation: Under this arrangement, the borrower is provided with working capital finance by the bank against the security of mova

discuss the cost of capital in finance

A Company has the following capital structure: Debt: $2,000,000 Preferred: $1,000,000 Common: $4,000,000 Retained Earnings: $3,000,000 The amounts shown gives book values.  The m

Briefly describe the major differences between a sole proprietorship and a corporation. Under which form would you choose for a business, and why? Describe the meaning of financi

Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchang

Q. What is Unsanctioned Expenditure? The expenditure, which is regularly incurred without the sanction of the competent authority or beyond the sanctioned limit of funds provid

Multicollinearity As the degree of correlation between the independent variables increases, the regression coefficients become less reliable. That is, although the independent

Q. Explain the concept of working capital. Distinguish between variable and permanent working capital. What is the significance of such distinction in financing working capital req

How does a preemptive right protect the interests of existing stockholders? A preventive right protects the interests of existing stockholders by giving them the opportunity to

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