Early Amortization

AAA

DEFINITION of 'Early Amortization'

A type of credit enhancement used in certain asset backed securities (ABS). Early amortization is an accelerated payment of bond principal in an asset-backed security, usually triggered when there is a sudden increase in delinquencies in the underlying loans or when excess spread, the issuer's net profit after deducting servicing fees, charge-offs and other costs, falls below an acceptable level. Also called a payout event.



INVESTOPEDIA EXPLAINS 'Early Amortization'

Early amortization signals liquidity crisis for the originator, as funding dries up. The early payout protects investors from prolonged exposure to receivables with deteriorated credit performance. However, the investor is relying on the fixed income from the ABS - prepayment is an inherent risk for investors.



RELATED TERMS
  1. Fixed Amortization Method

    One of three methods by which early retirees of any age can access ...
  2. Gross Coupon

    A term used to describe the coupon received from a mortgage pool ...
  3. Charge-Off

    A term describing an expense on a company's income statement. ...
  4. Asset-Backed Security - ABS

    A financial security backed by a loan, lease or receivables against ...
  5. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
Related Articles
  1. How To Create A Modern Fixed-Income ...
    Investing Basics

    How To Create A Modern Fixed-Income ...

  2. Investing In Securitized Products
    Insurance

    Investing In Securitized Products

  3. Event-Linked Bonds: Competing Against ...
    Insurance

    Event-Linked Bonds: Competing Against ...

  4. Collateralized Debt Obligations: From ...
    Retirement

    Collateralized Debt Obligations: From ...

comments powered by Disqus
Hot Definitions
  1. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  2. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  3. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  4. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  5. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  6. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
Trading Center