Early Amortization

A A A

DEFINITION

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 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 their retirement ...
  2. Gross Coupon

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

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

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

    The risk stemming from the lack of marketability of an investment that cannot ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage or collection ...
  7. Prepayment Risk

    The risk associated with the early unscheduled return of principal on a fixed-income ...
  8. Payout

    The expected financial return from an investment over a given period of time. ...
  9. Treasury Direct

    The online market where investors can purchase federal government securities ...
  10. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations ...
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 ...

  5. Boost Your Portfolio Yield With Alternative ...
    Mutual Funds & ETFs

    Boost Your Portfolio Yield With Alternative ...

  6. The Role Of Speculators In The Commodity ...
    Investing Basics

    The Role Of Speculators In The Commodity ...

  7. Trade Like A Hedge Fund Master
    Options & Futures

    Trade Like A Hedge Fund Master

  8. A Career In Real Estate Portfolio Management
    Personal Finance

    A Career In Real Estate Portfolio Management

  9. Buying bonds at a premium? Note these ...
    Bonds & Fixed Income

    Buying bonds at a premium? Note these ...

  10. Want A Career In Asset Management? Read ...
    Investing Basics

    Want A Career In Asset Management? Read ...

comments powered by Disqus
Hot Definitions
  1. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  2. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  3. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  4. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
  5. Negative Carry

    A situation in which the cost of holding a security exceeds the yield earned. A negative carry situation is typically undesirable because it means the investor is losing money. An investor might, however, achieve a positive after-tax yield on a negative carry trade if the investment comes with tax advantages, as might be the case with a bond whose interest payments were nontaxable.
  6. Rounding Bottom

    A chart pattern used in technical analysis, which is identified by a series of price movements that, when graphed, form the shape of a "U". Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements.
Trading Center