Credit enhancement mechanisms, Financial Management

Assignment Help:

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.


Related Discussions:- Credit enhancement mechanisms

Income statement, Income Statement A formal statement of the parts...

Income Statement A formal statement of the parts used in determining an organization net income that is called profit and loss statement. The several categories reported

Explain about modern approach of financial management, Q. Explain about Mod...

Q. Explain about Modern Approach of financial management? The modern approach considers the term financial management in a broad sense. According to this approach the finance f

Prepare a monthly cash budget, Citilink will start a new business line on 1...

Citilink will start a new business line on 1st July, 2011 to make and sell bus souvenirs. The target sales and production volume are 525,000 in next year. The following projected

Decision-tree approaches, 1024x768 Normal 0 fals...

1024x768 Normal 0 false false false EN-IN X-NONE X-NONE

Rating methodologies of a debt instrument, The key parameters t...

The key parameters taken into account while rating a debt instrument are as follows: 1. Industry Evaluation - This involves an evaluation of the

Problems using walter''s model, the following information related to sun lt...

the following information related to sun ltd.paid-up capital-1000000. earnings of the co-100000. dividend paid-80000. price-earning ratio(pie)-20. no of equity shares-100000.find o

Derivatives, Derivatives - Financial instruments whose value varies with va...

Derivatives - Financial instruments whose value varies with value of an underlying asset (like a stock, BOND, commodity or currency) or index like interest rates. Financial instrum

Operating cycle, discuss an operating cycle of vegetable growing in Uganda

discuss an operating cycle of vegetable growing in Uganda

Define in market mergers, What are "in-market" mergers? A: An in-market m...

What are "in-market" mergers? A: An in-market merger is one that occurs between two banks operating in similar geographic area, usually a city or metropolitan area. The merged in

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd