Modeling Structured Finance Cash Flows with Microsoft® Excel®: A Step-by-Step Guide

CHAPTER 2

Asset Cash Flow Generation

The first calculations to do are related to cash flowing into the structure, which is known as asset cash flow generation. Depending on the type of transaction, there can be wide variability as to how cash is generated. For most structured finance transactions, the asset cash flow generation is usually in the form of principal and interest from the assets. Some transactions, particularly those involving infrastructure, rely on consultant studies or simulations that project future cash flow. Regardless of the type of transaction, a cash flow model must have some type of assumption for the periodic inflow of cash.

With a structured framework, there are many intricate and distinct parts to creating the cash flows that assets produce such as interest calculations, default and prepayment assumptions, recoveries, and the like. Explaining in detail how each of these parts work is fundamental to accurate modeling and also beneficial to building a financial modeler’s skill. Explaining the most basic concepts first, this chapter then focuses on creating a notional asset cash flow—that is, cash flows without giving affect to prepayments and defaults. Once this is complete, each detail will be introduced one at a time to create the actual asset cash flow.

Prior to explaining exactly how to model structured asset cash flows, the answers to two questions need to be taken into account: (1) How will the assets exist over time? (2) And what and how much data ...