a key feature of securitisations. Because the investors in a securitisation are not supposed to take the credit risk of the originator, all moneys received from borrowers (whether interest or principal) is passed on immediately to the issuer. Broadly, principal payments are then passed-through to the securitisation investors. This is important because in most securitisations, the borrowers are entitled under the contracts that make up the securitised assets to repay their loans early. For example, residential mortgage borrowers will repay their mortgage when they move property. This, in turn, means that securitisation investors are not certain of when they will receive their principal back. It also means that principal is likely to be repaid in uneven amounts at various times in the life of the securitisation transaction. This uncertainty affects the price of a securitisation. The pass-through nature of securitisations is one of the features that distinguish them from traditional corporate bonds where there is a set and known maturity and where principal is usually paid in full on the maturity date. To price the securitisation, investors will need to make a number of assumptions on how fast the borrowers will pay so as to decide a weighted average life (WAL) (see Weighted Average Life and CPR). To provide greater comfort as to the maturity of securitisation, certain devices such as step-up coupons with call options are often used (see Step-up Coupon and Call Options)

« Back to Lexicon Index
Copyright © PCS 2024
DisclaimerPrivacy Policy

Created by Proformat