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

What is lending system, Q. What is Lending System? Under the note lendi...

Q. What is Lending System? Under the note lending system, the borrower takes a loan, usually of 90 days Duration, against a promissory note. The loan may be renewed or retired

Why iceq go beyond icq, ICEQ'sgo beyond ICQ's Discover whether erro...

ICEQ'sgo beyond ICQ's Discover whether error or fraud is possible. Concentrates on significant frauds or errors which might be possible and so only a handful of key con

Evaluate earning yield plus growth in earning method, Q. Evaluate Earning Y...

Q. Evaluate Earning Yield plus Growth in Earning Method? Earning Yield plus Growth in Earning Method: - If the EPS of a company is likely to grow at a constant rate of growth t

Problem 1, You work for a small, for-profit health system. Your system is i...

You work for a small, for-profit health system. Your system is interested in acquiring a Critical Access Hospital (CAH) at a price of $65,000,000. The purchase would be made from r

Which formula would you use to solve for the payment, Which formula would y...

Which formula would you use to solve for the payment required for a car loan if you know the interest rate, length of the loan, and the borrowed amount?  Explain. To answer for

How is present value affected by a change in discount rate, How is present ...

How is present value influenced by a change in the discount rate? Present value is oppositely related to the discount rate.  Alternatively, present value moves in the reverse dire

Explain official reserve assets and its major components, Explain official ...

Explain official reserve assets and its major components. Answer:  Official reserve assets are those financial assets which can be employed as international means of payments.

What is business risk, What is Business risk It is related to response ...

What is Business risk It is related to response of the firm's earnings before taxes andinterest, or operating profits, to changes in sales. When cost of capital is used to eval

Event-driven strategies-investment strategy of hedge funds, Event-Driven St...

Event-Driven Strategies : These strategies are solely focus on events of corporate life cycle for investing. They involve significant opportunities created by corporate events such

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