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. If you want to change selection, open document below and click on "Move attachment" 3.1.4.1. Internal Credit Enhancement 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. 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