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Malz Structured Product Model (Final Cash flows)


Hi @David Harper CFA FRM ,

I'm seeing an issue with Malz reading on structured finance. When speaking of final cash flows it seems that he is using the Senior Redemption + Mezzanine interest to test of the senior tranche should be paid in full? Is this correct? For me it should be the 86M instead of 89.675M

Senior Tranche --> 85M Redemption + 1 M interest
Mezannine --> 10 M Redemption + 4.675 Interest


David Harper CFA FRM

David Harper CFA FRM
Staff member
Hi @RajivBoolell Your interest is off. The senior bond has principal amount of $85.0 million but the annual interest is Libor + 50 bps where Malz assumes L = 5.0% such that amount due to Senior bondholders is given by 85.0 * (1 + 5.0% + 0.50%) = 85.0 * 1.0550 = 89.675. Similarly amount due to Junior bondholders is $10.0 * (1 + L + 5.0%) = 10.0 * 1.10 = $11.0. For others (I know you realize this), please note that the Asset collateral experiences the defaults, but not these Senior/Junior (aka, Mezzanine) investor notes. So the initial liability structure (Senior = $85, Junior = $10) doesn't change over the five years, it's Asset loan pool that experiences defaults such that the "incoming" interest income decreases over time, but the full interest is being paid from the waterfall to these investors over on the liability side (until the end when the test occurs). I hope that's helpful,
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