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

Case let 1, which type of approaching to each firm

which type of approaching to each firm

Waht are additional information required in chromex plc, Additional informa...

Additional information required Specification of a time scale for the evaluation. Predict cash flow details year by year for period specified in the time scale. An approxima

Pension fund system - uk, The UK Pension Fund System The UK Pension sys...

The UK Pension Fund System The UK Pension system is a three pillar pension system. A flat-rate first-tier pension is provided by the state and is known as the Basic State Pensi

Valuing zero-coupon bond, As we know, zero-coupon bonds are issued wi...

As we know, zero-coupon bonds are issued without any periodic coupon payments. The investor gets the interest and the principal on a maturity date. The interest i

What is sinking fund, What is Sinking Fund A provision which requires t...

What is Sinking Fund A provision which requires the corporation to set aside a fixed amount every year to help provide for orderly repayment of the debt issue.

Delivery and credit risk, When a borrower uses repo market for fund f...

When a borrower uses repo market for fund financing, he has to deliver the securities to the lender. One way to do this is to deliver the collateral to the lender

Determine the cost of capital in emerging nation, How can we measure a comp...

How can we measure a company's cost of capital in emerging nations, especially when there is no state bond which we could take as a reference? Although there is no state bond w

Sustainable growth rate, You are given the following information for Clapto...

You are given the following information for Clapton Guitars, Inc. Profit margin 6.3% Total Asset turnover 1.6 Total debt ratio 0.44 Payout ratio 35% Calculat

Interference of central bank in markets, Interference of Central bank in Ma...

Interference of Central bank in Markets: Some dilemmas exist in the issue of central bank intervention in the market to correct the volatilities in the prices. In some countrie

Calculation of weighted average cost of capital, Calculation of Weighted Av...

Calculation of Weighted Average Cost of Capital The calculation of weighted cost of capital involves the following steps: (i) Calculate the cost of each source of funds.

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