Residual cash flows, in general, cannot be derived directly using simple formulas. As a result, it is useful to rely on a testing approach that focuses on measuring residual cash flow as the monthly difference between collateral cash flow and non-residual bond cash flow. Verifying the accuracy of collateral cash flows and non-residual bond cash flows allows many of the sources of errors inherent in residual cash flow forecasting to be reduced or eliminated by deduction.

The first step in this process involves testing the accuracy of monthly collateral cash flows. To test the accuracy of collateral cash flows, the time-series of rates and cash flows in Tables 1 and 2 should be output to a spreadsheet then tested for accuracy. Accurately modeled collateral cash flows imply that the model is using collateral-indicative data correctly, incorporating fair value assumptions appropriately, and accurately projecting the sum total of funds used to debt service bonds and make residual payments each month. Numerous sources of potentially large errors are eliminated if collateral cash flows are correct.