cross calling

Definition

A method of bond redemption used by issuers that takes prepayments received from lower rate loans to make payments on high-yield bonds. For example, a bank packages two mortgage loans with 5% and 8% rates into high-yield, high-risk mortgage-backed securities (MBS) with coupon rates of 7% and 15%; the bank then uses the interest payments on the 5% loan to pay the 15% coupon principal. This leaves the 7% bondholder relying on the 8% borrower for repayment of the MBS.
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