How can the cash flow of a credit card receivable-backed security be altered prior to the principal-amortization period?
What will be an ideal response?
The cash flow of a credit card receivable-backed security can be altered prior to the
principal-amortization period when credit card borrowers pay more or less than the interest due. More details are given below.
In contrast to an auto loan-backed security, the principal repayment of a credit card
receivable-backed security is not amortized. For a specified period of time (varying from 18 months to 10 years) before the principal-amortization period, the principal payments made by credit card borrowers constituting the pool are retained by the trustee and reinvested in additional receivables.
In contrast to amortizing assets, nonamortizing assets do not have a schedule for the periodic payments that the borrower must make. Instead, a nonamortizing asset is one in which the borrower must make a minimum periodic payment. If that payment is less than the interest on the outstanding loan balance, the shortfall is added to the outstanding loan balance. If the periodic payment is greater than the interest on the outstanding loan balance, then the difference is applied to the reduction of the outstanding loan balance. There is no schedule of principal payments (i.e., no amortization schedule) for a nonamortizing asset.
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