Redemptions schedule

A bond is simply a long-term promissory note. It is a contract established between borrower and lender in a document called an indenture. A bond indenture includes a detailed description of assets that are pledged, together with any protective clauses and provisions for redemption. A trustee is appointed to look after the interest of the bondholders. The trustee is normally a commercial bank. Bonds may be issued with a call provision that enables a company to redeem its bonds at any date earlier than scheduled. Obviously, this would be an advantage to a company in times of falling interest rates. However, a company has to pay more than the par value of the bond for this privilege. The additional amount is called the bond premium. 

In the event of a mortgage bank becoming insolvent, the Pfandbriefe creditor would receive a preferential claim over the assets in the respective cover pool, which is there solely to protect them. They would not be required to participate in the insolvency procedures, but instead have any claim satisfied on schedule in accordance with the terms of the respective issue out of the cover assets. However, if the claim cannot be satisfied on time, in respect of coupon payments and redemptions because the cover pool is insolvent, separate proceedings will then commence in regard to the pool affected. 

Prepayments are the most important factor in determining the redemption profile of the notes in a pass-through transaction. The prepayment rate is usually measured as an annualised Conditional Prepayment Rate (CPR), which is defined as the proportion of the outstanding balance of the mortgages that is paid down ahead of schedule during the period. Exhibit 11.10 illustrates the paydown profile for the same example transaction as in Exhibit 11.9, but with an increased prepayment rate of 35% CPR. 

The master trust structure gives originators a high degree of flexibility over the redemption profiles of the notes they can create. The emphasis has understandably been on creating bullet securities in order to attract investors who would prefer to invest in securities with traditional bullet redemption profiles and short legal maturities. There have also been notes with a scheduled redemption profile issued from master trust structures and, in practice, the redemption profiles that can be created will only be limited by the size of the trust, the length of the required accumulation period, and any other note redemptions that are due from the same trust. 

The master trust transactions are largely insensitive to prepayment rates. The only requirement is that the principal receipts in the trust are sufficient for it to accumulate the bullet payments to meet the scheduled redemption dates. The principal payment rate, measured as the proportion of collateral redeemed or repurchased, has been running at an average rate of 4% per month. 

The typical credit card transaction structure has three different cash flow periods revolving, accumulation, and early amortisation. Each period performs a distinct function and allocates cash flows differently. Credit card transactions are usually structured as soft bullets in order to mimic a traditional corporate bond, that is, investors receive monthly or quarterly payments of interest with one single payment of principal on the scheduled redemption date. 

The investor interest is not reduced to zero on the scheduled redemption date. 

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