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Tranches in securitization

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Uploaded by on Oct 1, 2008

In a securitization, we can take a balance-sheet perspective: on the left-hand side, credit-sensitive assets (collateral) have value, create cash flow, and contain risk; on the right, liabilities (tranches issued to investors) IN TOTAL must preserve value, cash flow and risk.

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Uploader Comments (bionicturtledotcom)

  • Great video but in your last example the coupon received by the senior tranche (10%) should be inferior to that received by the subordinated tranche (2%)

  • @fth9110 yes, agreed: the subordinated tranche should have the higher coupon. Nice catch! Thank you, David

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  • When talking about securitization "tranches" always come up. what are they ? and what purpose do they serve?

  • It will be the same but the cash flows vary accordingly, the same as happening with LIBOR.

  • What happens if the assets that are being securitized are not on fixed rate but rather float? Do they use the same technique as you showed?

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