Credit card receivable-backed securities, Financial Management

Assignment Help:

For holders of CARDS, the interest is paid monthly and the principal is not amortized. The principal payments made by credit card borrowers are retained by the trustee for a specific period known as lock-out period or revolving period to be reinvested in additional receivables. The lock-out period varies from 18 months to 10 years.

The period after the lock-out period during which the principal is paid to investors is called principal-amortization period. The different structures used in amortization of credit card receivables are: (i) the pass-through structure, (ii) the controlled-amortization structure, and (iii) the bullet-payment structure. In the first case, the principal cash flows from the credit card accounts are paid to the security holders on a pro rata basis.

In the second case, a predetermined principal amount is set at a very low level so that the obligations are met even under certain inadvertent conditions. The investor is paid the predetermined principal amount or the pro rata amount, whichever is less.

In the third case, the investor receives the full amount at one time. But there is no guarantee that the amount will be paid in full. Some portion of principal is deposited monthly into an account by the trustee. The account will generate interest to make periodic interest payments and will accumulate the principal to be repaid in lump sum.

There may be situations under which the amortization of principal has to be done earlier before the completion of the lock-in period. In such situations, provisions that are made are referred to as "early amortization or rapid amortization". The primary purpose of this provision is to safeguard the credit quality of the issue. When this early amortization provision is activated, the cash flows will be altered. The situations under which this may occur are: (a) the default of the servicing party; (b) inability of the trust to generate income to pay for the coupon and the servicing fee; (c) decline in credit support below a particular level; and (d) violation of the agreements by the issuer regarding pooling and servicing.


Related Discussions:- Credit card receivable-backed securities

Mid term quiz, iau.la/im/fin500.pdf need help with 100 questions with multi...

iau.la/im/fin500.pdf need help with 100 questions with multiple answers quiz!

Personnel characteristics, Workers interest in participation is also influe...

Workers interest in participation is also influenced by certain personnel or group characteristics. For example several research studies have shown that both very low and very high

Securities analysis, 7. Bill Peters is the investment officer of a $60 mill...

7. Bill Peters is the investment officer of a $60 million pension fund. He has become concerned about the big price swings that have occurred lately in the fund’s fixed income sec

Explain how to compute the overall balance, Explain how to compute the over...

Explain how to compute the overall balance and discuss its significance. The overall BOP is defined by computing the cumulative balance of payments involving the current account,

Advantages of budgetary control, ADVANTAGES OF BUDGETARY CONTROL 1. Pr...

ADVANTAGES OF BUDGETARY CONTROL 1. Profits are maximizes. 2. It makes easy the controlling of activities. 3. Effective co-ordination is made achievable. 4. Executive

Paper on Estate Planning (3–5 pages), Evaluate the tools commonly used in e...

Evaluate the tools commonly used in estate planning, including trusts, life insurance, and annuities. Compare the tools as to how they would apply for a couple in their mid-50s who

Calculate the economic order quantity, Q. Calculate the Economic Order Quan...

Q. Calculate the Economic Order Quantity? Calculate the Economic Order Quantity from the following details: Annual Inventory Requirements = 4, 00,000 units Cost of placin

Which type of insurance company generally takes risks, Which type of insura...

Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company? The risks protected against by cas

Accounting framework - convention of conservation, Accounting Framework - C...

Accounting Framework - Convention of Conservation Conservatism refers to the principle and practices that are established through way of tradition, reluctance to change from e

Opposite project - net present value, A company has the opportunity to sell...

A company has the opportunity to sell an old machine. The machine is fully depreciated to a zero book value but could be sold for $5,000. If the company did not sell the machine, i

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