Asset-Backed Securities
Chapters in this video
- 0:00 The securitization machine and 30/360
- 1:11 CMOs and timing risk: PAC, TAC, and companion tranches
- 3:02 Riding the interest rate rollercoaster
- 4:13 IO strips and the inverse rate trap
- 5:06 CDOs and credit risk: the three-story flood
- 7:08 CMO versus CDO: timing versus credit
- 8:10 Rapid-fire exam recap
What this video covers
- The four-step securitization process from originator to investor, and why the 30/360 day-count convention matters for mortgage-backed securities
- How CMO tranches redirect cash flows and why they have expected average lives rather than fixed maturity dates
- The PAC tranche collar: protection against both prepayment and extension risk within a specified band
- Why the TAC tranche only protects against prepayment risk at a single speed, leaving extension risk exposed
- How the companion (support) tranche absorbs excess volatility and why it carries the highest yield
- Why IO strips increase in value when rates rise due to extension risk, and why PO strips behave like normal bonds
- How CDOs split credit risk across senior, mezzanine, and equity tranches with cash flowing top-down and losses rising bottom-up
- The exam-critical distinction: CMOs divide timing risk on mortgage pools, CDOs divide credit risk on diversified debt
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