220.127.116.11. Internal Credit Enhancement
or reserve funds
are another form of internal credit enhancement, and come in two forms: a cash reserve fund and an excess spread account. A cash reserve fund is a deposit of cash that can be used to absorb losses. An excess spread account involves the allocation into an account of any amounts left over after paying out the interest to bondholders. The excess spread, sometimes called excess interest cash flow, is the difference between the cash flow received from the assets used to secure the bond issue and the interest paid to bondholders. The excess spread can be retained and deposited into a reserve account that serves as a first line of protection against losses. In a process called turboing, the excess spread can be used to retire the principal, with the most senior tranche having the first claim on these funds.
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