A Special Purpose Vehicle (SPV) has acquired a large pool of assets and intends to issue securities to investors. The structure of the deal wants to…

(OR) (1) Pass Through Certificates (PTCs): Key characteristics of these instruments are as follows: These securities represent direct claim of the investors on all the assets that has been securitized through SPV.Since all cash flows are transferred, the investors carry proportional beneficial interest in the asset held in the trust by SPV.On completion of securitization by the final payment of assets, all the securities are terminated simultaneously.Skewness of cash flows occurs in early stage if principals are repaid before the scheduled time. (2) Pay Through Security (PTS): Key characteristics of these instruments are as follows: It can restructure different tranches from varying maturities of receivables.This structure permits desynchronization of servicing of securities issued from cash flow generating from the asset. Further, this structure also permits the SPV to reinvest surplus funds for short term as per their requirement.In case of early retirement of receivables the surplus cash can be used for short term yield.This structure also provides the freedom to issue several debt tranches with varying maturities. (3) Stripped Securities: Stripped Securities are created by dividing the cash flows associated with underlying securities into two or more new securities. Those two securities are as follows: (i) Interest Only (IO) Securities (ii) Principle Only (PO) Securities Key characteristics of these instruments are as follows: As each investor receives a combination of principal and interest, it can be stripped into two portion of Interest and Principle.Being highly volatile in nature these securities are less preferred by investors.In case yield to maturity in market rises, PO price tends to fall as borrower prefers to postpone the payment on cheaper loans.Whereas if interest rate in market falls, the borrower tends to repay the loans as they prefer to borrow fresh at lower rate of interest.In contrast, value of IO's securities increases when interest rate goes up in the market as more interest is calculated on borrowings.When interest rate due to prepayments of principals, IO's tends to fall.