Explanation:
Excess spread is an internal credit enhancement mechanism that represents the difference between the interest income received from the underlying pool of assets and the interest paid to the investors on the issued notes (plus servicing fees and other expenses). It is typically the first line of defense against credit losses in a securitized structure.
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611.2. Among the following types of credit enhancement, which is the difference between the return on the underlying assets and the interest rate payable on the issued notes (liabilities)?
A
Excess spread
B
Step-up margin
C
Over-collateralization
D
Return on equity (ROE)
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