External credit enhancement, Financial Management

Assignment Help:

It is in the form of third-party guarantees which protect against losses up to a particular fixed level. This is available in the form of a corporate guarantee, a letter of credit from a bank or a bond insurance. Though the third-party guarantee is referred to as "first loss protection", it is generally not used as a primary protection.

For example, if in a Rs.100 crore asset-backed securities deal, 10% is guaranteed, then for any losses that are in excess of 10%, the sponsor will not be liable. Thus, we see that an asset-backed security which has an external credit support is prone to credit risk of the third-party guarantor. If the third-party guarantor undergoes a downward change in credit rating, then the rating of the issue will also be lowered even if the performance of the entire structure is intact. This is because of the general practice the rating agencies follow by which the credit quality of the issue is assessed to be only as good as the lowest link in credit enhancement.


Related Discussions:- External credit enhancement

Explain compound value of an annuity, Q. Explain Compound Value of an Annui...

Q. Explain Compound Value of an Annuity? Compound Value of an Annuity: - Annuity demotes to the periodic flows of equal amounts. FV = A {(1+i)n - 1}/i Instance: - Mr. X i

Put, Put This is an agreement which is allowing a holder of privacies t...

Put This is an agreement which is allowing a holder of privacies to sell them back to the issuer at a specified amount during a specified time interval. This technique protects

Share holder value maximizations , Question based on Share Holder Value Max...

Question based on Share Holder Value Maximizations ? Hatsun Agro Product limited (HAPL) over the last Five years has shown a steady growth in its sales revenue and profits. The

Volatility risk, Expected volatility is a major factor that affects t...

Expected volatility is a major factor that affects the value of an option. Expected volatility of an option on bond is referred to as 'expected yield volatility'. The

Treasury strips, A treasury strip can be sold in two parts based on i...

A treasury strip can be sold in two parts based on its components. When the investor is empowered with a right to receive the coupon payments on sale of its treas

Define working capital, What is working capital? Working capital contains...

What is working capital? Working capital contains the current assets of the firm.

Define the term- future cost and historical cost, Define the term- Future C...

Define the term- Future Cost and Historical Cost Future cost of capital refers to expected cost of funds to be raised to finance a project. In contrast, historical cost signifi

Advantage and disadvantage of aggressive working capital, What are the adva...

What are the advantages and disadvantages of the aggressive working capital financing approach? An aggressive working capital financing approach generally results in a lower cost

Show the phase of traditional approach, Q. Show the Phase of Traditional Ap...

Q. Show the Phase of Traditional Approach? Phase of Traditional Approach: According to the traditional approach the way in which the overall cost of capital and the value of 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