Securitization is the process whereby relatively illiquid financial assets such as mortgages are packaged together and sold off to individual investors. Securitization turns relatively illiquid instruments into quite liquid investments called asset-backed securities. A market maker agrees to create a secondary market by buying and selling the securities. Securitization originated in the mortgage market in the early 1980s, when mortgage loans began to be packaged together and sold off as securities in the secondary market often with government insurance guaranteeing that the principal and interest would be repaid. Securitization became popular because it provides a way of protecting against interest rate risk in an environment of increased interest rate volatility. Securitization offers reduced credit risk because of the pooling of assets.
Read More:The Concept of SecuritizationProcess of SecuritizationBenefits of Securitization
The securitization process involves a number of participants. The role of major participants in securitization process are given below.
The party behind a securitization is the originator. This entity generates (originates) or owns the defined or identifiable cash flow (that is, an income stream from receivables). An example of an originator with assets that can be securitized is a retail bank. Following assets are typically securitized: mortgages, automobile loans, credit card receivables, trade receivables, educational loans, etc.…
Securitization, also known as asset-backed securitization or structured financing, has been defined as a financing instrument whereby a company transfers rights in current or future receivables or other financial assets to an entity that serves as a “special purpose vehicle” (SPV), which in turn issues securities to capital market investors and uses the proceeds from the issue to pay for the financial assets. The source of the receivables could be any right of payment or asset that generates an income with a stable cash flow. The existing or future receivables could be the income generated, among others things by residential or commercial loans, credit card receivables, automobile loans, student loans, royalties on intellectual property, tax receivables or any other income source that is regular and predictable.
Read More: The Concept of Securitization
Securitization can also be considered a form of arbitrage between a less-efficient traditional debt market and a more-efficient capital market where old securities are dressed up as new asset-backed securities by financial firms for profit. Therefore, the slicing and dicing of cash flows and credit risks of the underlying pools of assets into securitized products with varying risk/return profiles and maturity spectra, and the spreading of risk among wider classes, serves the interest of consumers, borrowers, and the nation at large.…
Securitization, a process by which illiquid financial assets are transformed into tradable commodities, is one of the most significant innovations of the financial world. Having originated in 1970 in mortgage markets in the USA, securitization has already converted over $90 trillion worth of non-tradable assets into marketable securities. As a powerful tool of liquidity and risk management, securitization has had a tremendous impact on the welfare of the world economy. In mortgage markets in many countries it provides a cheaper source of financing, and thus promotes the demand for housing. In the banking sector, securitization is widely used for allocating capital more efficiently, transforming risk into a tradable security, and reducing the overall cost of capital. It has enabled developing countries to emerging market institutions to raise their sovereign ratings ceilings and thereby tap international capital markets for lower-rate financing.
Read More: The Concept of Securitization
The process of securitization typically characterized by the following steps:Identification Process: The lending financial institution either a bank or any other institution for that matter which decides to go in for securitization of its assets is called the ‘originator’. The originator might have got assets comprising of a variety of receivables like commercial mortgages, lease receivables, hire purchase receivables etc.…
A substitute and concurrent theory to the Capital Asset Pricing Model (CAPM) is one that incorporates multiple factors in explaining the movement of asset prices. The arbitrage pricing model (APT) on the other hand approaches pricing from a different aspect. It is rarely successful to analyse portfolio risks by assessing the weighted sum of its components. Equity portfolios are far more diverse and enormously large for separate component assessment, and the correlation existing between the elements would make a calculation as such untrue. Rather, the portfolio’s risk should be viewed as a single product’s innate risk. The APT represents portfolio risk by a factor model that is linear, where returns are a sum of risk factor returns. Factors may range from macroeconomic to fundamental market indices weighted by sensitivities to changes in each factor. These sensitivities are called factor-specific beta coefficients or more commonly, factor loadings. In addition, the firm-specific or idiosyncratic return is added as a noise factor. This last part, as is the case with all econometric models, is indispensable in explaining whatever the original factors failed to include. In contrast with the CAPM, this is not an equilibrium model; it is not concerned with the efficient portfolio of the investor. Rather, the APT model calculates asset pricing using the different factors and assumes that in the case market pricing deviates from the price suggested by the model, arbitrageurs will make use of the imbalance and veer pricing back to equilibrium levels. At its simplest form, the arbitrage pricing model can have one factor only, the market portfolio factor. This form will give similar results to the Capital Asset Pricing Model (CAPM).…
Price may be defined as the value of product attributes expressed in monetary terms which a consumer pays or is expected to pay in exchange and anticipated of the expected or offered utility. It helps to establish mutually advantageous economic relationship and facilitates the transfer of ownership of goods and services from the company to buyers. The managerial tasks involved in product pricing include establishing the pricing objectives, identifying the price governing factors, ascertaining their relevance and relative importance, determining product value in monetary terms and formulation of price policies and strategies. Thus, pricing plays a far greater role in the marketing-mix of a company and significantly contributes to the effectiveness and success of the marketing strategy and success of the firm.
A business firm will have a number of pricing objectives. Some of the them are primary, some of them are secondary, some of them are long-term while others are short-term. However, all pricing objectives emanate from the corporate and marketing objectives of the firm.
Some of the pricing objectives are discussed below:
- Pricing for a Target Return: This is a common objective found with most of the established business firms. Here, the objective is to earn a certain rate of return on investment (ROI) and the actual price policy is worked out to earn that rate of return.
Concept of Marketing Mix
Marketing mix is one of the major concepts in modern marketing. It is the combination of various elements which constitutes the company’s marketing system. It is the set of controllable marketing variables that the firm blends to produce the response it wants in the target market. Though there are many basic marketing variables, four factors are most important, called the four P’s of Marketing Mix: Product, Price, Place and Promotion. However, in recent times, the ‘four P’s’ have been expanded to the ‘seven P’s’ with the addition of process, physical evidence and people.
The “Four P’s”, which are still regarded by many theorists as the main ingredients in the Marketing Mix, were introduced by McCarthy.
Dividing the multitude of marketing variables or mix into four distinct categories makes it much easier to formulate a marketing strategy. The four categories are (1) product, (2) place, (3) price, and (4) promotion, and are commonly called the “four p’s.” Note also that the client is not part of, but rather is the target of the marketing mix (Perreault, Jr. & McCarthy, 2004, p. 38).
Before developing a marketing mix, the marketer usually has a target market in mind. Once the target market is determined, the decisions about each of the four P’s of marketing mix will be made with this target market in mind.…