in the asset pool in mortgage-backed securities…. people are paying EMIs i.e interest and principal both…but the bond that SPE issues are a bullet bond i.e they only want interest for now but principal later… isn’t it creating an asset-liability mismatch for SPE.
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SPE has issued bullet bonds, for which they have to pay interest periodically but principal only on maturity hence, they have asset backing of loans given (for which people are paying interest and principal)
and the liability of repaying the principal on bonds is in future…
thus, we have high assets compared to liabilities (favorable mismatch between asset & liability for SPE)
if this is the case than why bond holders face contraction and extraction risk and what SPE do the surplus fund
i think the case of not repaying principal back until maturity is the case of non amortizing loans say in credit card bills