Credit enhancement mechanisms, Financial Management

Credit enhancement is a key part of the securitization transaction in structured finance, and is important for credit rating agencies. Credit enhancement is of two types - External credit enhancements, and Internal credit enhancement.

  • External Credit Enhancement: It comes in the form of third-party guarantees like corporate guarantee, letter of credit, and bond insurance. The disadvantage of this mechanism is that it is based on the credit risk of the third party guarantor. If the third party guarantor feels downgraded then the issue would also be subjected to downgrade, even if the structure is giving expected performance. In other words, this mechanism places the investor to event risk because the downgrading of the third party guarantor may result in downgrading of the asset-backed securities.

  •  Internal Credit Enhancement: It comes in the form of reserve funds, over collateralization, and senior/subordinate structures. This is a more complex form of mechanism when compared to that of external credit enhancement mechanism.

Posted Date: 9/8/2012 7:11:44 AM | Location : United States







Related Discussions:- Credit enhancement mechanisms, Assignment Help, Ask Question on Credit enhancement mechanisms, Get Answer, Expert's Help, Credit enhancement mechanisms Discussions

Write discussion on Credit enhancement mechanisms
Your posts are moderated
Related Questions
1. Let's look at the cash flow of the volatility (variance) spread swap: - ( σ 2 Nasdaq - σ 2 S & P 500 ) N 2 It is noticeable from this expression that investor

A mortgage may be defined as a pledge of property to secure payment of a debt. Depending upon the terms of mortgage agreed upon between the lender and the borrower, mor

Floor Brokers These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They w

Do you believe an increased common stock cash dividend can send a signal to the common stockholders?  If so, what signal might it send? An increase in cash dividends is frequentl

Q. Traditional Approach of Financial Management? Traditional Approach: - Under this schema the role of financial management was limited to the procurement of funds on suitable

Extendible reset bonds are floaters in which the issuer is required to reset the coupon rate so that the issue will trade at a predetermined price (usually above

What are some of the government needs imposed on a public corporation that are not imposed on a private, closely held corporation? Public corporations should submit audited finan

Explain about the market-based and bank-based systems. A clear distinction between market-based in USA and UK and bank-based systems as in Germany, Japan and France define by s

DISCOUNTING TECHNIQUE is also called present value technique. It is the process of calculating the present value of cash flows.  Discounting is determining the present value of a

Other than zero coupon bonds, all fixed income securities make periodic payments in the form of coupon interest. This coupon interest can be rei