"Before waterfall"

CFA General
#1

can someone plz explain what it means to value CMO’s “before the waterfall” instead of "after the waterfall? For example, if I want to compare conditional prepayment rates across different models, I should only be comparing “before waterfall” and excluding after. thanks!

#2

tranches? http://www.investopedia.com/terms/w/waterfallpayment.asp

#3

thanks iheartmath. i saw that page too but i still dont get it. So I understand that you pay the first tranche first and then the second tranche wahtever is left over and so on. But which payments are the “after waterfall” payments then, and why should we only compare “before waterfall” prepayments? any ideas? thx

#4

The waterfall typically refers to principles who invest 30% or so into a fund. They then get 30% of the gross earnings if the preferred return is met. The remaining 70% of earnings then go to ‘the money’ or everyone else invested in said fund. http://simon-mlogs.blogspot.com/2008/02/waterfall-hurdles.html Rough example I found. http://www.ciremagazine.com/article.php?article_id=855 An IRR waterfall arrangement rectifies this situation by positively compensating the developer for a project well done, while at the same time minimizing downside risk for the equity investor. The concept is simple: If the returns are lower than expected, a greater proportion flows to the equity investor; if the returns are greater than expected, a larger share flows to the developer. Since the developer has the greatest influence on a project’s success, the waterfall arrangement allocates risk and return in a more equitable fashion.

#5

thanks a lot ditchdigger! the blog looks really useful, will try to understand it.

#6

this might be a stupid/lame question - but since I work in an actuarial department, I’m not exposed to really any of this sort of “slang” (basically, the terminology they dont teach in a textbook). Are there any good resources/websites/blogs etc. to familiarize myself?

#7

jimjohn Wrote: ------------------------------------------------------- > can someone plz explain what it means to value > CMO’s “before the waterfall” instead of "after the > waterfall? > > For example, if I want to compare conditional > prepayment rates across different models, I should > only be comparing “before waterfall” and excluding > after. > > > thanks! It just means to value it before the waterful payment is made. Seems pretty intuitive. what are you confused by?