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


Praise for Modeling Structured Finance Cash Flows with Microsoft® Excel®

"You can roll up your sleeves, dive into this book, and shortly thereafter, you have a full-blown honest-to- goodness working model of a transaction. This sure beats the old method of slaving at the feet of gurus for years in the hopes that they'll throw you a scrap. It almost feels as though Allman has given away a shortcut through the 'hazing' period of learning, but then I am grateful I have a resource with which to train new analysts or remind myself how some things work."
—Omar Haneef, Global Securitized Markets, Citigroup

"Allman has written a book that reveals to the reader/user a robust framework for using Excel to model structured finance transactions. Both seasoned cash flow modelers and those new to, or curious about, how structured finance transactions are analyzed can benefit from this book."
—Henry Wilson, Bond Insurance Company Analyst

"A powerful, concise, and tiered approach. It's a bedrock foundation to build on for both the art and science of structured finance modeling. An excellent platform from which to leverage your financial knowledge and personal capital."
—William Preinitz, Managing Director, Citigroup

"An essential tool for any credit officer wishing to gain a general or in-depth understanding of cash flow modeling for new or existing deals."
—Joseph B. Keener, Structured Portfolio Management, Citigroup London

Written by industry expert Keith Allman, this well-rounded resource provides detailed guidance on constructing one of today's most adaptable models—the cash flow model. Filled with in-depth insight, expert advice, and illustrative examples, Modeling Structured Finance Cash Flows with Microsoft Excel explains individual functions and formulas, while also examining the theory behind the spreadsheets. Each chapter begins with a discussion of theory, followed by a section called "Model Builder," in which Allman translates the theory into functions and formulas. In addition, the companion CD-ROM features all of the modeling exercises, as well as a final version of the model that is created in the text.

By combining specific application instruction with theory, Modeling Structured Finance Cash Flows with Microsoft Excel will teach you skills that can be instantly applied to professional-level modeling.

Keith Allman is currently the principal trainer and founder of Enstruct, a structured finance analytics training company. Previously he was a Vice President at Citigroup in their Global Fixed Income, Structured Finance Division. He has built and reviewed hundreds of models from many different sectors. Allman received his master's degree in international affairs from Columbia University.


About the Author.


The Three Basic Elements of a Cash Flow Model.


Cash Flow Structure.


The Process of Building a Cash Flow Model.

Plan and Design.

Obtain All Necessary Information.

Construct Basic Framework.

Develop Advanced Structure.

Validate Assumptions.

Test Model.

How This Book Is Designed.

CHAPTER 1. Dates and Timing.

Time Progression.

Dates and Timing on the Inputs Sheet.

Day-Count Systems: 30/360 versus Actual/360 versus Actual/365.

Model Builder 1.1: Inputs Sheet—Dates and Timing.

Dates and Timing on the Cash Flow Sheet.

Model Builder 1.2: Cash Flow Sheet—Dates and Timing.


Naming Cells and Ranges.

Data Validation Lists.


CHAPTER 2. Asset Cash Flow Generation.

Loan Level versus Representative Line Amortization.

How Asset Generation Is Demonstrated in Model Builder.

Asset Generation on the Inputs Sheet.

Fixed Rate Amortization Inputs.

Floating Rate Amortization Inputs.

Model Builder 2.1: Inputs Sheet Asset Assumptions and the Vectors Sheet.

Asset Generation on the Cash Flow Sheet.

Model Builder 2.2: Notional Asset Amortization on the Cash Flow Sheet.






CHAPTER 3. Prepayments.

How Prepayments Are Tracked.

SMM: Single Monthly Mortality.

CPR: Conditional Prepayment Rate.

PSA: Public Securities Association.

ABS: Absolute Prepayment Speed.

Historical Prepayment Data Formats.

Building Prepayment Curves.

Prepayment Curves in Project Model Builder.

The Effect of Prepayments on Structured Transactions.

Model Builder 3.1: Historical Prepayment Analysis and Creating a Projected Prepayment Curve.

Model Builder 3.2: Integrating Projected Prepayments in Asset Amortization.


Weighted Averages Using SUMPRODUCT and SUM.

CHAPTER 4. Delinquency, Default, and Loss Analysis.

Delinquencies versus Defaults versus Loss.

The Importance of Analyzing Delinquency.

Model Builder 4.1: Building Historical Delinquency Curves.

Deriving Historical Loss Curves.

Model Builder 4.2: Building Historical and Projected Loss Curves.

Analyzing Historical Loss Curves.

Model Builder 4.2 Continued.

Projecting Loss Curves.

Model Builder 4.2 Continued.

Integrating Loss Projections.

The Effects of Seasoning and Default Timing.

Model Builder 4.3: Integrating Defaults in Asset Amortization.

CHAPTER 5. Recoveries.

Model Builder 5.1: Historical Recovery Analysis.

Projecting Recoveries in a Cash Flow Model.

Model Builder 5.2: Integrating Recoveries into Project Model Builder.

Final Points Regarding Recoveries.

CHAPTER 6. Liabilities and the Cash Flow Waterfall.

Priority of Payments and the Cash Flow Waterfall.

The Movement of Cash for an Individual Liability.

Types of Liabilities.


Model Builder 6.1: Calculating Fees in the Waterfall.


Model Builder 6.2: Calculating Interest in the Waterfall.


Model Builder 6.3: Calculating Principal in the Waterfall.

Understanding Basic Asset and Liability Interactions.

CHAPTER 7. Advanced Liability Structures: Triggers, Interest Rate Swaps, and Reserve Accounts.

Triggers and Their Affect on the Liability Structure.

Model Builder 7.1: Incorporating Triggers.


Model Builder 7.2: Incorporating a Basic Interest Rate Swap.

Final Notes on Swaps.

Reserve Accounts.

Model Builder 7.3: Incorporating a Cash-Funded Reserve Account.

Conclusion of the Cash Flow Waterfall.


AND and OR.

CHAPTER 8. Analytics and Output Reporting.

Internal Testing.

Cash In versus Cash Out.

Model Builder 8.1: Cash In versus Cash Out Test.

Balances at Maturity.

Model Builder 8.2: Balances at Maturity Tests.

Asset Principal Check.

Model Builder 8.3: Asset Principal Check Test.

Performance Analytics.

Monthly Yield.

Model Builder 8.4: Calculating Monthly Yield.

Calculating the Monthly Yield.

Bond-Equivalent Yield.

Model Builder 8.5: Calculating Bond-Equivalent Yield.

Modified Duration.

Model Builder 8.6: Calculating Modified Duration.

Output Reporting.

Model Builder 8.7: Creating the Output Report.

The Importance of Testing and Output.


Conditional Formatting.

Goal Seek.

Array Formulas.

CHAPTER 9. Understanding the Model.

The Complete Model in Review.

Understanding the Effects of Increased Loss.

Varying Principal Allocation Methodologies.

Varying Prepayment Rates.

Varying Loss Timing.

Varying Recovery Rate and Lag.

The Value of a Swap.

Additional Testing.

CHAPTER 10. Automation Using Visual Basic Applications (VBA).

Conventions of This Chapter.

The Visual Basic Editor.

The Menu Bar.

The Project Explorer and the Properties Window.

VBA Code.

Simple Automation for Printing and Goal Seek.

Model Builder 10.1: Automating Print Procedures.

Model Builder 10.2: Automating Goal Seek to Optimize Advance Rates.

Understanding Looping to Automate the Analytics Sheet.

Model Builder 10.3: Automating Goal Seek to Perform Transaction Analytics.

Automated Scenario Generation.

Model Builder 10.4: Creating a Transaction Scenario Generator.

Working with Macros in Excel.

CHAPTER 11. Conclusion.

The Investment Banker’s Perspective.

The Investor’s Perspective.

The Issuer’s Perspective.

The Financial Guarantor’s Perspective.

The Big Picture Perspective.

Appendix: Using This Book with Excel 2007.

About the CD-ROM.