Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.Vinod Kothari, chartered accountant, is an author, trainer, and consultant on securitization, asset-based finance, credit derivatives, and derivatives accounting. Kothari is a visiting faculty member at the Indian Institute of Management, where he teaches structured finance.

• Preface xiiiAbout the Authors xviiPart One Background 1Chapter 1 Introduction 3What Is a Securitization? 5Illustration of a Securitization 8Securities Issued in a Securitization 10Key Points of the Chapter 11Chapter 2 Issuer Motivation for Securitizing Assets and the Goals of Structuring 13Reasons Securitization Is Used for Funding 13Structuring Goals 21Key Points of the Chapter 24Part Two Structuring ABS Transactions 29Chapter 3 Structuring Agency MBS Deals 31Prepayments and Prepayment Conventions 31Sequential Pay Structures 38Planned Amortization Class Bonds and Support Bonds 43Targeted Amortization Class Bonds 50Accrual Bonds and Accretion-Directed Bonds 50Floating Rate Bond Classes 55Notional Interest-Only Bond Classes 60Key Points of the Chapter 61Chapter 4 Structuring Nonagency Deals 65Identification of the Asset Pool 68Selection of the Assets 69Identification of Risks 70Determination of the Sources and Size of Credit Support 72Determination of the Bond Classes 73Time Tranching of Bond Classes 75Selecting the Pay Down Structure for the Bond Classes 76Determination of the Amount and Sources for Liquidity Support 77Determining if Any Prepayment Protection Is Needed 78Inclusion of Structural Protection Triggers 79Key Points of the Chapter 80Chapter 5 Credit Enhancements 85Credit Enhancement Mechanisms 86Sizing of Credit Enhancements 93Key Points of the Chapter 97Chapter 6 Use of Interest Rate Derivatives in Securitization Transactions 101Interest Rate Swaps 101Caps and Floors 115Counterparty Risk 118Key Points of the Chapter 120Chapter 7 Operational Issues in Securitization 123The Servicing Function 124Types of Servicers 124Servicer Strengths 125Servicer Qualities 128Servicing Transition 141Backup Servicer 142Reporting by the Servicer 142Role of Trustees in Operation of the Transaction 143Fraud Risk 144Key Points of the Chapter 145Part Three Review of ABS Collateral 147Chapter 8 Collateral Classes in ABS: Retail Loans 149Collateral Classes: Basis of Classification 149Collateral Classes: Main Types 152Credit Card Receivables 153Auto Loan Securitization 161Key Points of the Chapter 165Chapter 9 Asset-Backed Commercial Paper Conduits and Other Structured Vehicles 169Types of ABCP Conduits 170Traditional Securitization and ABCP 173ABCP Collateral 174Credit Enhancement Structure 174Liquidity Support 177Parties to an ABCP Program 178Rating of ABCP Conduits 180Key Points of the Chapter 182Chapter 10 Securitization of Future Cash Flows: Future Revenues, Operating Revenues, and Insurance Profits 187Future Revenues Securitization 187Whole Business or Operating Revenues Securitization 195Securitization of Insurance Profits 204Key Points of the Chapter 206Part Four Collateralized Debt Obligations 209Chapter 11 Introduction to Collateralized Debt Obligations 211Why Study CDOs? 211Terminology: CDO, CBO, CLO 212Types of CDOs 213Typical Structure of a CDO 217Basic Economic Drivers of CDOs 220CDO Market and the Health of Banking 224Growth of the CDO Market 225Key Points of the Chapter 227Chapter 12 Types of Collateralized Debt Obligations 229Balance Sheet CDOs 229Arbitrage CDOs 243Resecuritization or Structured Finance CDOs 249Index Trades and Index Tracking CDOs 251Key Points of the Chapter 252Chapter 13 Structuring and Analysis of CDOs 255Measures of Pool Quality 255Asset and Income Coverage Tests 257Ramp-Up Period 261The CDO Manager 261Investing in CDOs 265Collateral and Structural Risks in CDO Investing 266Key Points of the Chapter 270Part Five Implications for Financial Markets 273Chapter 14 Benefits of Securitization to Financial Markets and Economies 275Securitization and Funding Costs 277Securitization and Financial Intermediation 281Benefits of Securitization in an Economy 284Key Points of the Chapter 288Chapter 15 Concerns with Securitization’s Impact on Financial Markets and Economies 291Reduces the Effectives of Monetary Policy 291Adverse Impact on Banks 293Lax Underwriting Standards and Poorly Designed Securities 294Increases Opaqueness of Bank Risk 300Key Points of the Chapter 302Appendix A  Basics of Credit Derivatives 305Elements of a Credit Derivative Transaction 306Bilateral Deals and Capital Market Deals 310Reference Asset or Portfolio 311Structured Portfolio Trade 312Types of Credit Derivatives 321Appendix B  Valuing Mortgage-Backed and Asset-Backed Securities 325Cash Flow Yield Analysis 325Zero-Volatility Spread 327Valuation Using Monte Carlo Simulation and OAS Analysis 328Measuring Interest Risk 339References 343Index 349

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.Vinod Kothari, chartered accountant, is an author, trainer, and consultant on securitization, asset-based finance, credit derivatives, and derivatives accounting. Kothari is a visiting faculty member at the Indian Institute of Management, where he teaches structured finance.

• Preface xiiiAbout the Authors xviiPart One Background 1Chapter 1 Introduction 3What Is a Securitization? 5Illustration of a Securitization 8Securities Issued in a Securitization 10Key Points of the Chapter 11Chapter 2 Issuer Motivation for Securitizing Assets and the Goals of Structuring 13Reasons Securitization Is Used for Funding 13Structuring Goals 21Key Points of the Chapter 24Part Two Structuring ABS Transactions 29Chapter 3 Structuring Agency MBS Deals 31Prepayments and Prepayment Conventions 31Sequential Pay Structures 38Planned Amortization Class Bonds and Support Bonds 43Targeted Amortization Class Bonds 50Accrual Bonds and Accretion-Directed Bonds 50Floating Rate Bond Classes 55Notional Interest-Only Bond Classes 60Key Points of the Chapter 61Chapter 4 Structuring Nonagency Deals 65Identification of the Asset Pool 68Selection of the Assets 69Identification of Risks 70Determination of the Sources and Size of Credit Support 72Determination of the Bond Classes 73Time Tranching of Bond Classes 75Selecting the Pay Down Structure for the Bond Classes 76Determination of the Amount and Sources for Liquidity Support 77Determining if Any Prepayment Protection Is Needed 78Inclusion of Structural Protection Triggers 79Key Points of the Chapter 80Chapter 5 Credit Enhancements 85Credit Enhancement Mechanisms 86Sizing of Credit Enhancements 93Key Points of the Chapter 97Chapter 6 Use of Interest Rate Derivatives in Securitization Transactions 101Interest Rate Swaps 101Caps and Floors 115Counterparty Risk 118Key Points of the Chapter 120Chapter 7 Operational Issues in Securitization 123The Servicing Function 124Types of Servicers 124Servicer Strengths 125Servicer Qualities 128Servicing Transition 141Backup Servicer 142Reporting by the Servicer 142Role of Trustees in Operation of the Transaction 143Fraud Risk 144Key Points of the Chapter 145Part Three Review of ABS Collateral 147Chapter 8 Collateral Classes in ABS: Retail Loans 149Collateral Classes: Basis of Classification 149Collateral Classes: Main Types 152Credit Card Receivables 153Auto Loan Securitization 161Key Points of the Chapter 165Chapter 9 Asset-Backed Commercial Paper Conduits and Other Structured Vehicles 169Types of ABCP Conduits 170Traditional Securitization and ABCP 173ABCP Collateral 174Credit Enhancement Structure 174Liquidity Support 177Parties to an ABCP Program 178Rating of ABCP Conduits 180Key Points of the Chapter 182Chapter 10 Securitization of Future Cash Flows: Future Revenues, Operating Revenues, and Insurance Profits 187Future Revenues Securitization 187Whole Business or Operating Revenues Securitization 195Securitization of Insurance Profits 204Key Points of the Chapter 206Part Four Collateralized Debt Obligations 209Chapter 11 Introduction to Collateralized Debt Obligations 211Why Study CDOs? 211Terminology: CDO, CBO, CLO 212Types of CDOs 213Typical Structure of a CDO 217Basic Economic Drivers of CDOs 220CDO Market and the Health of Banking 224Growth of the CDO Market 225Key Points of the Chapter 227Chapter 12 Types of Collateralized Debt Obligations 229Balance Sheet CDOs 229Arbitrage CDOs 243Resecuritization or Structured Finance CDOs 249Index Trades and Index Tracking CDOs 251Key Points of the Chapter 252Chapter 13 Structuring and Analysis of CDOs 255Measures of Pool Quality 255Asset and Income Coverage Tests 257Ramp-Up Period 261The CDO Manager 261Investing in CDOs 265Collateral and Structural Risks in CDO Investing 266Key Points of the Chapter 270Part Five Implications for Financial Markets 273Chapter 14 Benefits of Securitization to Financial Markets and Economies 275Securitization and Funding Costs 277Securitization and Financial Intermediation 281Benefits of Securitization in an Economy 284Key Points of the Chapter 288Chapter 15 Concerns with Securitization’s Impact on Financial Markets and Economies 291Reduces the Effectives of Monetary Policy 291Adverse Impact on Banks 293Lax Underwriting Standards and Poorly Designed Securities 294Increases Opaqueness of Bank Risk 300Key Points of the Chapter 302Appendix A  Basics of Credit Derivatives 305Elements of a Credit Derivative Transaction 306Bilateral Deals and Capital Market Deals 310Reference Asset or Portfolio 311Structured Portfolio Trade 312Types of Credit Derivatives 321Appendix B  Valuing Mortgage-Backed and Asset-Backed Securities 325Cash Flow Yield Analysis 325Zero-Volatility Spread 327Valuation Using Monte Carlo Simulation and OAS Analysis 328Measuring Interest Risk 339References 343Index 349

Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.Vinod Kothari, chartered accountant, is an author, trainer, and consultant on securitization, asset-based finance, credit derivatives, and derivatives accounting. Kothari is a visiting faculty member at the Indian Institute of Management, where he teaches structured finance.

• Preface xiiiAbout the Authors xviiPart One Background 1Chapter 1 Introduction 3What Is a Securitization? 5Illustration of a Securitization 8Securities Issued in a Securitization 10Key Points of the Chapter 11Chapter 2 Issuer Motivation for Securitizing Assets and the Goals of Structuring 13Reasons Securitization Is Used for Funding 13Structuring Goals 21Key Points of the Chapter 24Part Two Structuring ABS Transactions 29Chapter 3 Structuring Agency MBS Deals 31Prepayments and Prepayment Conventions 31Sequential Pay Structures 38Planned Amortization Class Bonds and Support Bonds 43Targeted Amortization Class Bonds 50Accrual Bonds and Accretion-Directed Bonds 50Floating Rate Bond Classes 55Notional Interest-Only Bond Classes 60Key Points of the Chapter 61Chapter 4 Structuring Nonagency Deals 65Identification of the Asset Pool 68Selection of the Assets 69Identification of Risks 70Determination of the Sources and Size of Credit Support 72Determination of the Bond Classes 73Time Tranching of Bond Classes 75Selecting the Pay Down Structure for the Bond Classes 76Determination of the Amount and Sources for Liquidity Support 77Determining if Any Prepayment Protection Is Needed 78Inclusion of Structural Protection Triggers 79Key Points of the Chapter 80Chapter 5 Credit Enhancements 85Credit Enhancement Mechanisms 86Sizing of Credit Enhancements 93Key Points of the Chapter 97Chapter 6 Use of Interest Rate Derivatives in Securitization Transactions 101Interest Rate Swaps 101Caps and Floors 115Counterparty Risk 118Key Points of the Chapter 120Chapter 7 Operational Issues in Securitization 123The Servicing Function 124Types of Servicers 124Servicer Strengths 125Servicer Qualities 128Servicing Transition 141Backup Servicer 142Reporting by the Servicer 142Role of Trustees in Operation of the Transaction 143Fraud Risk 144Key Points of the Chapter 145Part Three Review of ABS Collateral 147Chapter 8 Collateral Classes in ABS: Retail Loans 149Collateral Classes: Basis of Classification 149Collateral Classes: Main Types 152Credit Card Receivables 153Auto Loan Securitization 161Key Points of the Chapter 165Chapter 9 Asset-Backed Commercial Paper Conduits and Other Structured Vehicles 169Types of ABCP Conduits 170Traditional Securitization and ABCP 173ABCP Collateral 174Credit Enhancement Structure 174Liquidity Support 177Parties to an ABCP Program 178Rating of ABCP Conduits 180Key Points of the Chapter 182Chapter 10 Securitization of Future Cash Flows: Future Revenues, Operating Revenues, and Insurance Profits 187Future Revenues Securitization 187Whole Business or Operating Revenues Securitization 195Securitization of Insurance Profits 204Key Points of the Chapter 206Part Four Collateralized Debt Obligations 209Chapter 11 Introduction to Collateralized Debt Obligations 211Why Study CDOs? 211Terminology: CDO, CBO, CLO 212Types of CDOs 213Typical Structure of a CDO 217Basic Economic Drivers of CDOs 220CDO Market and the Health of Banking 224Growth of the CDO Market 225Key Points of the Chapter 227Chapter 12 Types of Collateralized Debt Obligations 229Balance Sheet CDOs 229Arbitrage CDOs 243Resecuritization or Structured Finance CDOs 249Index Trades and Index Tracking CDOs 251Key Points of the Chapter 252Chapter 13 Structuring and Analysis of CDOs 255Measures of Pool Quality 255Asset and Income Coverage Tests 257Ramp-Up Period 261The CDO Manager 261Investing in CDOs 265Collateral and Structural Risks in CDO Investing 266Key Points of the Chapter 270Part Five Implications for Financial Markets 273Chapter 14 Benefits of Securitization to Financial Markets and Economies 275Securitization and Funding Costs 277Securitization and Financial Intermediation 281Benefits of Securitization in an Economy 284Key Points of the Chapter 288Chapter 15 Concerns with Securitization’s Impact on Financial Markets and Economies 291Reduces the Effectives of Monetary Policy 291Adverse Impact on Banks 293Lax Underwriting Standards and Poorly Designed Securities 294Increases Opaqueness of Bank Risk 300Key Points of the Chapter 302Appendix A  Basics of Credit Derivatives 305Elements of a Credit Derivative Transaction 306Bilateral Deals and Capital Market Deals 310Reference Asset or Portfolio 311Structured Portfolio Trade 312Types of Credit Derivatives 321Appendix B  Valuing Mortgage-Backed and Asset-Backed Securities 325Cash Flow Yield Analysis 325Zero-Volatility Spread 327Valuation Using Monte Carlo Simulation and OAS Analysis 328Measuring Interest Risk 339References 343Index 349