The Evolution of the Paydown Visualization

Here’s one of the earliest attempts at visualizing the paydown of a security, from MATLAB, still in use today:

Chart generated using MATLAB

It took me a few to get over the initial visual assault. This looks like an area chart on acid. But let’s face it, who cares about ugly if the chart works, right?

At first, I was thrown off by the blue-toned blocks that end so abruptly, annotated as Principals A, B & C in the legend. But when you think about how principal is repaid in a securitization it starts to make sense. First Tranche A gets paid its principal in full, then B and then C. Interest payments follow similar patterns — the yellow slice that represents “Interest A” gets fully repaid at the same time principal payments terminate for Tranche A, and so on.

This chart is a visualization of the dollar amounts of principal and interest that are being paid out to the different tranches over time.

This is not a very good visulization — it is frustratingly difficult to eyeball the vertical separation between the diagonal lines that form the different types of payments to properly gauge the proportion of principal to interest.

This is how our eyes are likely going to read the gap between the two lines that form the boundary of an interest payment:

This is wrong, and how most people would read this.

Here’s how one is supposed to read it:

This is right, but hard to do.

But does dollar amount really matter? Counterintuitive as it may seem, in this wonky corner of structured finance, no. Any trader worth his salt looking at such a visualization would already know what the bond coupon is and that it’s not going to change.

What matters more is what will happen (Will all the interest expected in pay period actually get paid? Will there be a principal writedown?) and when it will happen (Is the weighted average life of the paydown of this tranche significantly earlier or later than expected?).

Which brings us to Bloomberg’s paydown visualization, or the first real leap in data viz design thought in this chart.

Here’s a screenshot of a paydown chart on the Bloomberg Terminal that I found on Bloomberg L.P.’s PR site:

Instead of focusing on the dollar amounts of the payments, this viz focuses on payment events and when they happen. HUGE.

In addition to showing principal and interest payments, which is all that’s shown in the MATLAB chart, this one also shows losses, interest shortfalls and the weighted average life of the paydown in each tranche.

It’s also waaay easier to read when you’re dealing with a security that has a more complex tranche structure.

BUT. It looks like a stacked bar chart, a classic quantity comparison viz. Albeit, a very strange stacked bar with multiple stacks of the same color. Confusingly, the paydown chart above is a timeline visualization masquerading as a bar chart.

Here’s how this chart works:

Each tiny slice of the bar represents a single period of time during which one of four things happened, as per the legend:

a principal + interest payment was received (P&I) an interest payment received (Interest) there was an interest shortfall (Int. Shortfall) there was a loss (Losses)

There’s also a little diamond shaped mark to denote the “WAL” or the Weighted Average Life of that tranche.

But there are two ways in which this chart fails: