Pass-through vs. pay-through structures, Financial Management

Assignment Help:

In a pass-through structure, each certificate holder will be allotted a proportion of the cash flow from the underlying pool of loans or receivables on a pro rata basis. Suppose an asset-backed security has the following structure:

  • Senior tranche Rs.100 crore (1000 certificates issued),

  • Subordinated tranche Rs.10 crore (100 certificates issued).

In the above structure, each certificate holder of the senior tranche and subordinated tranche would receive 1/1000 and 1/100 of the cash flow to be paid to the senior tranche/subordinated tranche from the collateral respectively.

In a pay-through structure, while a senior tranche can be split into different tranches, a subordinated tranche cannot be done so. The combined par value of the components of the senior tranche will be equal to the par value of the original senior tranche.

Let us recall that the senior-subordinated structure is useful to minimize the credit risk. This is because the loss in the deal can be met from the funds in the subordinated tranche. Thus, credit risk is redistributed from the senior tranche to the subordinated tranches. This process is referred to as credit tranching. If the senior tranche is split-up into different tranches each with different exposure to prepayment risk in a pay-through structure, prepayment risk is redistributed among the components of the senior tranches. This process is referred to as prepayment tranching or time tranching. 


Related Discussions:- Pass-through vs. pay-through structures

Evaluate alternative hedging strategies, Peak Inc. needs to order Canadian ...

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

Planning, how to do assignments based on these topics more specifically?

how to do assignments based on these topics more specifically?

Option adjusted spread, The formula explained in the above paragraph ...

The formula explained in the above paragraph enables the investor to compute the value of a bond with an embedded option as the difference between the value of an

How does accounts receivable factoring work, How does accounts receivable f...

How does accounts receivable factoring work?  What are the benefits to the two parties involved?  What are the risks? Factoring is when one firm trade accounts receivable (AR)

Average of relatives method, Average of Relatives Method We have seen ...

Average of Relatives Method We have seen the construction of an index number using the aggregates method. In this section, we shall see the construction of an index using the

Risk analysis, Your broker calls to offer you the investment opportunity of...

Your broker calls to offer you the investment opportunity of a lifetime, the chance to invest in mortgage-backed securities. The broker explains that these securities are entitled

Management accounting and financial management, Q. Distinguish between Mana...

Q. Distinguish between Management Accounting and Financial Management with clear mention of basis of differences. How does the traditional financial manager differ from the mode

Please help me solve this question, there are 3 compaies i have to find out...

there are 3 compaies i have to find out the price of equity share by using walters and gordons model.

Explain dual currency bond, Explain Dual Currency Bond A dual currency ...

Explain Dual Currency Bond A dual currency bond is a straight fixed-rate bond that is issued in one currency and pays coupon interest in that similar currency.  At maturity, th

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