Available funds cap
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
For floating-rate mortgage ABS, a limit on bond coupon tied to the weighted pool coupon; protects structure from basis risk.
Available funds cap in plain English
In some mortgage bonds, the interest paid TO investors floats up and down with market rates, but the interest coming IN from homeowners is capped by their actual mortgage rates. The "available funds cap" is a rule saying the bond can't promise to pay out more interest than the underlying mortgages are actually collecting. It's like a lemonade stand that only pays its investors from real lemonade sales — if sales are limited, the payout is limited too. This protects the deal from "basis risk," the danger that what it owes rises faster than what it takes in.
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