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
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 entity are subject to higher credit…
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…
Measures of Return
Financial market assets generate two different streams of return: income through cash dividends or interest payments and capital growth through asset price appreciation. Headline stock market indices typically report on price appreciation only. They do not include the dividend income…
Asset Class Characteristics
All asset classes have risk and return characteristics. Historical returns are neither forward-looking nor expected returns. Nevertheless, it is noteworthy that by examining the performance of the historical returns, we can understand the likely characteristics of a particular asset class….
Business, Sales, Operating Risk, and Financial Risks
Risk can be defined in several ways. However, one fairly simple definition is, “risk refers to the uncertainty of a return and the potential for financial loss.” Risk can arise from both financing and operating activities and can be classified…
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…
