overcollateralization
#credit-enhancement #fixed #income
Overcollateralization refers to the process of posting more collateral than is needed to obtain or secure financing. It represents a form of internal credit enhancement because the additional collateral can be used to absorb losses. For example, if at issuance the principal amount of a bond issue is $100 million and the value of the collateral is $110 million, the amount of overcollateralization is $10 million.
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3.1.4.1. Internal Credit EnhancementOvercollateralization refers to the process of posting more collateral than is needed to obtain or secure financing. It represents a form of internal credit enhancement because the additional collateral can be used to absorb losses. For example, if at issuance the principal amount of a bond issue is $100 million and the value of the collateral is $110 million, the amount of overcollateralization is $10 million. Over time, the amount of overcollateralization changes, for instance as a result of amortization, prepayments or defaults in the case of MBS. A major problem associated with overcollater Summary
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