Question

2. What are the methods of estimating fair value according to SFAS no 157(2006)?

3. Explain Securitization and its structures like:

Pass-through securitizations

Estimation of prepayment risk

Tranched securitizations

Answer 1

2)

Financial Accounting Standards Board issued SFAS 157, Fair Value Measurements, in September 2006 to define fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."  

Alternative methods for estimating fair values are as:

Market Approach-uses prices and other relevant information generated by market transactions involving identical /comparable assets /liabilities.

Income Approach- uses valuation techniques to convert future to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts.

Cost Approach-The cost approach is based on the amount that currently would be required to replace the service capacity of an asset.

3)

Securitisation:- The conversation of existing assets or future value cash flow into marketable securities for distinction. while the conversion of existing assets into marketable securities is know as asset-backed securitisation and the conversion of future cash flows into marketable securities is future-flows securitisation.

Pass-through security is a pool of fixed-income securities backed by a package of assets.

Estimation of payment risk- focuses on the underlying dynamics of interest rates and the assets that are the collateral on the mortgage.

Tanched securitizations - Portions of debt or securities that are structured to divide risk or group characteristics in ways that are marketable to various investors.