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Friday, 28-Oct-2011 00:03 Email | Share | Bookmark
A or even AAA rating and junior tranches that receive a junk rat

Asset Backed Security basics: Let's take collateralized mortgage obligations (CMOs) since they are the easiest to understand. In their simplest "pass through" form banks and other lenders originate loans, warehouse them for a brief time, package them into a bond, have the bond rated and sell the bond to investors. Instead of making money from the net interest margin over the life of the underlying loans,mac cosmetics wholesale the originators earn origination fees and payments from servicing rights. Investors who buy CMOs are actually buying the future cash flow from the underlying loans' principal and interest payments. Because the CMO is rated by the rating agencies the purchase price equals the future cash flow discounted to a yield consistent with the rating of the bond. The advantage of this system to the originator is that the fees are made up front, the servicing rights provide an ongoing source of fee income unless sold, the credit risk is transferred to the investor and the investment proceeds allow the originator to make still more loans. The investor gets a rated instrument with a yield appropriate to the rating. The role of rating agencies: Ratings on bonds convey an agency's assessment of the probability of default. Investors rely on ratings when making investment decisions because of the rating agency's track record.discount mac cosmetics For instance, over a 21 year period Moody's AAA rated bonds demonstrated a. 79% probability of default by year 10. In the asset backed securities world similarly rated loans or bonds are combined in a portfolio, then divided into different tranches with the riskiest tranches taking the first loss, receiving the lowest credit rating and offering the highest yield. wholesale mac cosmeticsSimilarly the least risky tranche takes the last loss, receives the highest credit rating and offers the lowest yield. In this way a portfolio comprised of B rated individual securities can be packaged to offer senior tranches that receive an A or even AAA rating and junior tranches that receive a junk rating.



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