Structured Securities
Overview
A
structured security
is a bond, where the cash are generated by an asset pool that backs the bond.
Definition
Because a structured security is essentially a bond, it is subject to the same
conventions. That is, the bond defines
such things as issues, maturity, face value, day count and other conventions. Once defined,
you can calculate what the contractual payments from the bond would be
(see
forecasting cash flows)
Asset Pool Cash Flows
In the same way that the cash flows from the security contract can be calculated, the contractual cash flows
from the underlyling asset pool can also be calculated. THis is necessary in order to validate that the
asset pool can pay the contractual payments of the top level security.
However, the assets in the pool are subject to
credit risk.
That is, they could default. In order for the structured security to have a good credit rating,
the security must be able to wisthstand defaults in the pool without default of the security itself.
credit risk
Cash Flow Routing