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

Cost of holding inventories, Q. Cost of Holding Inventories? The holdin...

Q. Cost of Holding Inventories? The holding of inventories engages blocking of a firm's funds. The various risks as well as costs in holding inventories are as below: (1) Ca

Explain the various key determinants of initial project cost, Question 1 Th...

Question 1 There are several elements which you can take into consideration, while budgeting a project. Describe these elements Question 2 Explain the different methods/source

Why do corporations declare stock splits and stock dividends, What is the e...

What is the effect of stock (not cash) dividends and stock splits on the market price of common stock?  Why do corporations declare stock splits and stock dividends? Stock divi

What are the main flaws of the profit maximisation criterion, What are the ...

What are the main flaws of the profit maximisation criterion The main technical flaws of this criterion are i) ambiguity, ii) quality of benefits and iii) timing of be

Define the basic motivations for a counterparty, Define the basic motivatio...

Define the basic motivations for a counterparty to enter into a currency swap.  Answer:  One major reason for a counterparty to enter into a currency swap is to exploit the comp

Assessing impact on management risk, Assessing Impact: As with the asse...

Assessing Impact: As with the assessment of likelihood, a valuable way of assessing impact would be the creation of categories of impact as follows: Level

Financial Managemente.., Madhuban group manufactures a product. The followi...

Madhuban group manufactures a product. The following particulars are as follows: 5 Monthly demand 1000 units Cost of placing an order Rs. 100 Annual carrying cost per unit Rs. 15 N

Market beta, The management of Nelson plc wish to estimate their firm’s equ...

The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

Define the term corporate and financial relations, Question: (a) Define...

Question: (a) Define the term "corporate and financial relations" and clearly state its components. (b) By using one example, identify the steps required to establishing cor

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