Financial Concepts

Separate Trading of Registered Interest and Principal of Securities (STRIPS)

STRIPS is the acronym for Separate Trading of Registered Interest and Principal of Securities.  STRIPS let investors hold and trade the individual interest and principal components  (also known as stripping)  of eligible Treasury notes and bonds as separate securities.

The origin of Strip Bonds can be traced to the 1960s, when Investment Dealers in the United States began (physically) clipping coupons from bearer government bonds and selling the individual pieces as separate securities. These clipped bonds gained immense popularity and their sales gained momentum in the early and mid 1980s as the interest rates surged to high levels. This was so because it allowed investors to lock in the very high yields that were available at that time, without worrying about the risk of not being able to re-invest future interest payments at the same high rates.… Read the rest

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Role of Credit Rating Agencies in Securitization

The credit rating agencies play a major role in the securitization process is to help investors to make informed decisions regarding investment in the underlying securities.   As guardians of the public through their research, analysis, and grading of various risks, rating agencies are expected to protect investors against taking excessive credit risk. The ratings allow institutions such as insurance companies and pension funds, who are prohibited to invest in securities rated below investment grade by their respective regulators, to actively participate in the securitized market as investors. Investment grade rating conveys information to the investors that the underlying instrument will pay coupon interest and principal according to the terms of the indenture.… Read the rest

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Different Types of Securitized Instruments

Pass Through Certificates and  Pay Through Certificates

There is no uniform name for the securities issued by the  special purpose vehicle  (SPV)  as such securities take different forms. These securities could either represent a direct claim of the  investors on all that the SPV collects from the receivables transferred to it: in this case, the securities are called pass through certificates as they imply certificates of proportional beneficial interest in the assets held by the SPV. Alternatively, the SPV might be re-configuring the cash flows by reinvesting it, so as to  pay to the investors on fixed dates, not matching with the dates on which the transferred  receivables are collected by the SPV.… Read the rest

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Types of Securitization Structures

Through securitization process, debts are factored and discounted in a structured and sophisticated manner which allows for the availability of funds and the repayment of the debt obligations through the creation of an insolvency remote vehicle which is separate, distinct and independent of the Originator.

Securitization structures are most appropriate for a company that seeks financing but is unable to tap funding sources for the desired tenor and funding cost because of its perceived credit risk. In general, any asset class with relatively predictable cash flows can be securitized.  The Special Purpose Vehicle (SPV)  re-designs the type of bonds to be issued depending on the deal structure.… Read the rest

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Steps Involved in the Process of Securitization

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.… Read the rest

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Importance of Financial Information to Stakeholders

In business there are two types of stakeholders that’s: internal stakeholders and external stakeholders. Internal stakeholders mean those stakeholders are dwell inside the company for examples: managers, employees, board members etc. On the other hand those stakeholders are not directly a part of a company is called external stakeholders for examples: shareholders, customers, suppliers etc. All shareholders want to see the use of their investment and thus asses the management through the financial statements. Because financial statements are very useful for businesses.

Stakeholders of the company require the financial information for following reasons.

  • To know how well the company is doing.
… Read the rest
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