Asset Cash Flows

Overview

The assets that back a structured security are typically just a portfolio of fixed income securities. Forecasting the cash flows is then simply just forecasting the cash flows of each security in the portfolio and aggregating. (see forecasting cash flows)

Portfolio Risks

For the non-variable interest rate assets, the contractual cash flows can be calculated exactly. However, there are several random elements that will impact the actual portfolio cash flows.

• Pre-Payments - some assets give the borrower the right pre-pay the asset. This is typical in American mortgages, for example.
• Defaults - sometimes, the borrower of a loan is unable to pay the aggred upon terms. IN such a case, the loan defaults and some amount of the loan value may or may not be recovered.

Floating Rate Assets

Some structured securities will include floating rate instruments in the pool of assets backing the structure. In such a case, the liabilities will generally have to have a floating rate tranche or some or variable structure in order to mitigate credit risk of the instrument.

Forecasting the cash flows of a variable rate instrument is difficult because the future is unknown. Given this, a modeler can only forecast cash flows for a given pre-specified interest rate scenario. (or group of simulated scenarios) see simulations for more information.

For info There are generally two common ways to generate a scenario for evaluating fixed Use a forward rate curve as the assumption or

Revolving Assets

eligibility criteria