Fixed-Income Securitization

Question 1

What is subordination?

Answer 1

A form of internal credit enhancement that relies on creating more than one bond tranche and ordering the claim priorities for ownership or interest an asset between tranches.

Also called “Credit Tranching”

Question 2

What is a “Purchase Agreement”?

Answer 2

A legal document in a securitization transaction that outlines the representations and warranties that the seller makes about the assets sold.

Question 3

What is a “Prospectus”?

Answer 3

A legal document in a securitization that describes the structure of the transaction, including the priority and amount of payments to be made to the servicer, administrators, and the ABS holders.