- Principal draw is the amount of money that is drawn down from the securitisation's cash flow to repay the principal on the underlying assets.
- The principal draw is typically made on a monthly or quarterly basis.
There are a number of applications of principal draw in securitisation, including:
- To repay the underlying assets: The principal draw is used to repay the principal on the underlying assets.
- To manage risk: The principal draw is an important factor in managing the risk of a securitisation. If the principal draw is not made, the underlying assets may default.
- To calculate the yield: The yield of a securitisation is typically calculated as the ratio of the interest payments to the price of the securitisation.
Here are some examples of how principal draw is used in securitisation:
- Mortgage-backed securities: In a mortgage-backed security, the underlying assets are mortgages. The borrowers on the mortgages make monthly principal and interest payments to the issuer of the securitisation. The issuer then makes a monthly principal draw from the securitisation's cash flow to repay the principal on the mortgages.
- CDO: In a collateralized debt obligation, the underlying assets can be a variety of debt instruments, such as mortgages, corporate bonds, and loans. The borrowers on the underlying assets make monthly principal and interest payments to the issuer of the CDO. The issuer then makes a monthly principal draw from the securitisation's cash flow to repay the principal on the underlying assets.
Principal draw is an important concept in securitisation, and it is used in a variety of ways.