P&I stands for principal and interest. It refers to the regular payments that are made by borrowers on a mortgage or other loan. The principal is the amount of money that is borrowed, and the interest is the cost of borrowing that money.
P&I payments are important in securitisation because they are the source of cash flow for the securitised debt. The securitised debt is typically structured so that the investors receive payments that are equal to the P&I payments on the underlying assets.
Here are some of the applications of P&I in securitisation:
- Calculating the value of securitised debt: The value of securitised debt is typically calculated based on the present value of the P&I payments. This is because the P&I payments are the source of cash flow for the securitised debt.
- Managing the risk of securitised debt: The risk of securitised debt can be managed by considering the P&I payments. For example, if the P&I payments are not stable, then the risk of the securitised debt will be higher.
- Understanding the performance of securitised debt: The performance of securitised debt can be tracked by monitoring the P&I payments. If the P&I payments are not being made, then this is a sign that the securitised debt is performing poorly.
Overall, P&I payments are an important part of securitisation. They are the source of cash flow for the securitised debt, and they can be used to manage the risk of the securitised debt.
Here are some examples of how P&I is used in securitisation:
- In a mortgage-backed security (MBS), the P&I payments from the underlying mortgages are used to pay the interest and principal on the MBS.
- In a collateralized debt obligation (CDO), the P&I payments from the underlying loans are used to pay the interest and principal on the CDO.
- In a synthetic securitization, the P&I payments from the underlying reference assets are used to pay the interest and principal on the synthetic securitization.