Analysis of Student Loan Asset-Backed Securities : Construction of a Valuation Model using a Trinomial Interest Rate Tree
Student debt in the U.S has grown rapidly over the last decades. A common practice among lenders is to pool the loans into securities that are sold off and traded between institutional investors. Since these securities have no market price this thesis aims to develop a valuation model. A time discrete approach is used, based on the Hull-White short-rate model to create a trinomial interest rate tree. This tree serves as a basis for the discounting of future cash flows generated from a specific student loan asset-backed security. In order to assess the credit risk, the student loan market and potential speculative bubbles are discussed.
The model is applied on the ”Navient Student Loan Trust 2015-2” and each tranche’s intrinsic value and yield to maturity is calculated. Since the model lacks proper quantification of the credit risk, the result is a valuation model that is best used when valuing asset-backed securities that can be deemed risk- free.
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