- Rapid amortisation is a type of amortisation schedule in which the principal of a securitisation is repaid over a shorter period of time than in a traditional amortisation schedule.
- This means that investors in a securitisation with rapid amortisation will receive their principal back sooner than investors in a securitisation with a traditional amortisation schedule.
There are a number of applications of rapid amortisation in securitisation, including:
- To reduce risk: Rapid amortisation can help to reduce the risk of default in a securitisation. This is because the issuer of the securitisation will have less time to build up a reserve of cash before the full amount of principal is due to be repaid.
- To attract investors: Rapid amortisation can help to attract investors to a securitisation. This is because investors are typically more willing to invest in a securitisation that has a shorter amortisation period.
- To manage cash flow: Rapid amortisation can help to manage the cash flow of a securitisation. This is because the issuer of the securitisation will receive more principal payments in the early years of the securitisation, which can be used to cover the costs of the securitisation, such as the fees paid to the arrangers and the servicer.
Here are some examples of how rapid amortisation 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 uses these payments to pay the interest on the securities and to repay the principal of the securities on a rapid amortisation basis.
- 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 uses these payments to pay the interest on the securities and to repay the principal of the securities on a rapid amortisation basis.
Rapid amortisation is a common process in securitisation, and it can help to reduce the risk and manage the cash flow of a securitisation.