COURSE OUTLINE:

ASSET BACKED SECURITIES
Why issuers securitize

Cash flow characteristics of securitized assets

• Amortizing versus nonamortizing assets

Credit enhancement mechanisms

Factors considered by the rating agencies

Call provisions

Measuring prepayments and defaults

• Voluntary versus involuntary prepayments
• Conditional prepayment rate (CPR) and absolute prepayment speed (ABS)
• Prospectus prepayment curve (PPC)
• Conditional default rate (CDR), losses versus defaults, loss severity

Extension and contraction risk

Passthrough versus paythrough structures

• Prepayment and credit tranching

Features of structures backed by amortizing assets

• Examples: Auto-backed securities, home equity loans, manufactured housing

Features of revolving structures

• Example: Credit card receivable structures
• Valuation of ABS
• Projecting cash flows
• Cash flow yield and its limitations
• Nominal spread versus zero-volatility spread (ZV OAS)
• Option-adjusted spread (OAS)
• Monte Carlo simulation to value an ABS: Application to home equity and manufacturing housing deals

Measuring interest rate risk

• Duration– effective versus modified
• Convexity– positive versus negative convexity

COLLATERALIZED DEBT OBLIGATIONS
Basic CDO Structure

Arbitrage versus balance sheet transactions

• Determinants of CDO arbitrage

Cash Flow CDO Transactions

• Rating agency analysis
• Focus on structured finance cash flow CDO

Market Value CDO Transactions

• Rating agency analysis

Synthetic CDO Transactions

Analyzing CDO Mezzanine Tranches

Analyzing CDO Equity Tranches

Management of a Portfolio of CDOs