Structures of Securitizations
Internal credit enhancements are common for securitizations called subordination (or credit tranching). Note that a tranche is the French word for “slice,” so tranches are simply different slices of the same security. Tranches of Asset-Backed Securities Credit Tranching There could…
Residential Mortgage Loans
A mortgage loan is a loan secured by real estate in which the borrower is obliged to make a predetermined series of payments. The mortgage gives the lender the right to foreclose if the borrower defaults. Foreclosure allows the…
Residential Mortgage-backed Securities
The bonds created from the securitization of mortgages are called residential mortgage-backed securities (RMBS). In the US, securities backed by residential mortgages are divided into 3 groups: those guaranteed by a federal agency; those guaranteed by a GSE (government-sponsored enterprises such…
Prepayment Risk
A mortgage prepayment option works much like a call option for the borrower. Mortgage prepayments can take one of these two forms: the borrower increasing the amount/frequency of payments; or the borrower repaying/refinancing the entire outstanding balance. Prepayment risk is…
Commercial Mortgage-backed Securities
Commercial Mortgage-Backed Securities (CMBS) are backed by a pool of commercial mortgages on income-generating properties such as multi-family properties (e.g., apartments), office buildings, industrial properties, shopping centers, hotels, and healthcare facilities. Credit Risk In the U.S. and other countries where…
Non-mortgage Asset-backed Securities
[vsw id=”9nVm9Qh4gKw” source=”youtube” width=”611″ height=”344″ autoplay=”no”] Many non-mortgage assets could be used as collateral in securitization such as auto loans, credit card receivables, personal loans, and commercial loans. Asset-backed securities (ABS) that are not guaranteed by a government or quasi-government…
Collateralized Debt Obligations (CDO)
Collateralized Debt Obligation (CDO) is a generic term used for a security backed by a diversified pool of one or more debt obligations. CDOs backed by corporate bonds and emerging market bonds are called Collateralized Bond Obligations (CBOs), whereas CDOs…
Spot Rates and Forward Rates
A forward rate is the interest rate on a loan beginning at some time in the future. A spot rate, on the other hand, is the interest rate on a loan beginning immediately. Therefore, the forward market rate is for…
DOL, DFL and DTL
The Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage are three important ratios that help us to quantify a company’s exposure to operational risk, financial risk, and a combination of the two, respectively. Degree of…
Effect of Financial Leverage on Net Income and ROE
Financial leverage refers to the extent to which a company finances its operations using fixed-cost financial obligations such as debt and preferred equity. The more a company uses debt financing, the higher its financial leverage and exposure to financial…
