Chapter 25

  1. attachment point
    The first percentage loss in the collateral pool that begins to cause reduction in a tranche is known as the lower attachment point, or simply the attachment point.
  2. bull call spread
    A bull call spread has two calls that differ only by strike price, in which the long position is in the lower strike price and the short position is in the higher strike price.
  3. bull put spread
    A bull put spread has two puts that differ only by strike price, in which the long position is in the lower strike price and the short position is in the higher strike price.
  4. call option view of capital structure
    The call option view of capital structure views the equity of a levered firm as a call option on the assets of the firm.
  5. collateralized debt obligation (CDO)
    A collateralized debt obligation (CDO) applies the concept of sturcturing to cash flows from a portfolio of debt securities into multiple claims; these claims are securities and are referred to as tranches.
  6. complete market
    A complete market is a financial market in which enough different types of distinct securities exist to meet the needs and preferences of all participants.
  7. contraction risk
    Contraction risk is dispersion in economic outcomes caused by uncertainty in the longevity - especially decreased longevity - of cash flow streams.
  8. detachment point
    The higher percentage loss point at which the given tranche is completely wiped out is known as the upper attachment point, or the detachment point.
  9. equity tranche
    The equity tranche has lowest priority and serves as the residual claimant.
  10. extension risk
    Extension risk is dispersion in economic outcomes caused by uncertainty in the longevity - especially increased longevity - of cash flow streams.
  11. floating-rate tranches
    Floating-rate tranches earn interest rates that are linked to an interest rate index, such as the London Interbank Offered Rate (LIBOR), and are usually used to finance collateral pools of adjustable-rate mortgages.
  12. interest-only (IO)
    Interest-only (IO) tranches receive only interest payments from the collateral pool.
  13. inverse floater tranche
    An inverse floater tranche offers a coupon that increases when interest rates fall and decreases when interest rates rise.
  14. lower attachment point
    The first percentage loss in the collateral pool that begins to cause reduction in a tranche is known as the lower attachment point, or simply the attachment point.
  15. mezzanine tranche
    A mezzanine tranche is a tranche with a moderate priority to cash flows in the structured product and with lower priority than the senior tranche.
  16. planned amortization class (PAC) tranches
    Planned amortization class (PAC) tranches receive principal payments in a more complex manner than do sequential pay CMOs.
  17. principal-only (PO)
    Principal-only (PO) tranches receive only principal payments from the collateral pool.
  18. put option view of capital structure
    The put option view of capital structure views the equity holders of a levered firm as owning the firm's assets through riskless financing and having a put option to deliver those assets to the debt holders.
  19. senior tranche
    The senior tranche is a tranche with the first or highest priority to cash flows in the structured product.
  20. sequential-pay collateralized mortgage obligation
    The sequential-pay collateralized mortgage obligation is the simplest form of CMO.
  21. state of the world
    A state of the world, or state of nature (or state), is a precisely defined and comprehensive description of an outcome of the economy that specifies the realized values of all economically important variables.
  22. structural credi risk models
    Structural credit risk models use option theory to explicitly take into account credit risk and the various underlying factors that drive the default process, such as (1) the behavior of the underlying assets, and (2) the structuring o the cash flows (i.e., debt levels).
  23. structuring
    In the context of alternative investments, structuring is the process of engineering unique financial opportunities from existing asset exposure.
  24. targeted amortization class (TAC) tranches
    Targeted amortization class (TAC) tranches receive principal payments in a manner similar to PAC tranches but generally with an even narrower and more complex set of ranges.
  25. tranche
    A tranche is a distinct claim on assets that differs substantially from other claims in such aspects as seniority, risk, and maturity.
  26. upper attachment point
    The higher percentage loss point at which the given tranche is completely wiped out is known as the upper attachment point, or the detachment point.
Author
LOT
ID
349726
Card Set
Chapter 25
Description
Introduction to Structuring
Updated