shubham_jaihind

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PASS THROUGH CERTIFICATES
In case of pass through certificates, payments to investors depend upon the cash flow from the assets backing such certificates, in others words, as and when cash (principal and interest) is received from the original borrower by the SPV, it is passed on to the holders of certificates at regular intervals and the entire principal is returned with the retirement of the assets packed in the pool. Thus, pass through certificates have a single maturity structure and the tenure of these certificates is matched with the life of the securitized assets.

PAY THROUGH CERTIFICATES
Pay through certificates have a multiple maturity structure depending upon the maturity pattern of underlying assets. Thus two or three types of securities with different maturity patterns like short term, medium term and long term may be issued. The greatest advantage is that they can be issued depending upon the investors demand for varying maturity patterns. This type is more attractive from the investors point of view because the yield is often inbuilt in the price of the securities themselves, ie they are offered at a discount to face value as in the case of deep discount bonds.

(imp: please do the differentiate found on page 72/73)

PARTIAL GUARANTEE STRUCTURE : page 73 of text book

ASSET BASED COMMERCIAL PAPERS
This type of structure is mostly prevalent in mortgage backed securities. Under this type, the SPV purchases a portfolio of mortgages from different sources (various lending institutions) and they are combined into a single group on the basis of interest rates, maturity dates and underlying collaterals. They are then transferred to a trust with in turn issues mortgage backed certificates to the investors. These certificates are issued against the combined principal value of the mortgages and they are also short term instruments. Each certificate holder is entitled to participate in the cash flow from underlying mortgages to the extent of his investments in the certificates.

INTEREST ONLY CERTIFICATES AND PRINCIPAL ONLY CERTIFICATES.
In the case of interest only certificates, payments are made to investors only from the interest incomes earned from the assets securities. As the very name suggests, payments are made to investors only from the repayment of principal by the original borrowers, in the case of principal only certificates. These certificates enable speculative dealings since the speculators know well that the interest rate movements would affect the bond values immediately. For instance, the principal only certificates would increase in value when interest rates go down. It is so because it becomes advantageous to repay the existing debts and resort to fresh borrowings at lower cost. This early redemption of securities would benefit the investors to a greater extent. Similarly, when the interest rates go up interest only certificate holders stand to gain since more interest would be available from the underlying assets. One cannot exactly predict the future movements of interest, and hence these certificates give much scope for speculators to play their game.
 
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