• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Penpoin

Better knowledge. Sharper Insight.

  • Management
  • Economics
  • Finance
Finance

Securitized Bonds: Meaning, Types, Benefits

Updated on April 14, 2022 · By Ahmad Nasrudin

Securitized Bonds Meaning Types Benefits
You are here: Home / Finance / Securitized Bonds: Meaning, Types, Benefits

Securitized bonds are bonds where coupon and interest payments come from a collection of other underlying assets. For example, a bank pools its mortgage into debt securities. This security is what we call securitized bonds.

Advertisement

In a simple model of securitized bonds

From the issuance of the bonds, the bank gets fresh money. They can use it to issue new mortgages or other types of loans.

On the other hand, banks use mortgage payment money from debtors to pay coupons and principal holders of bonds. In other words, the mortgage debtor indirectly pays the bondholders. Therefore, banks transfer risk from their balance sheets to debt markets through the sale of securitized bonds.

That contrasts with conventional bonds, which banks pay with internal cash sources. In this bond, insufficient internal cash can cause banks to default.

Conversely, in securitized bonds, the risk of bad credit mortgages can lead to a default on bonds. In extreme cases, banks may not have enough internal cash. However, it does not cause default while the debtor is still smoothly paying the mortgage installments.

Complex models involve third parties

Source: www.fimarkets.com

The above section is the simplest model of how securitized bonds work. The way securitization works are more complicated. Financial institutions as issuers or originator (for example, banks) do not directly issue bonds. It involves a third party, namely the Special Purpose Vehicle (SPV).

SPV is a separate entity and stands for buying assets from financial institutions. They are specialized entities that handle asset securitization. Two of the oldest and most famous examples of SPV are Fannie Mae and Freddie Mac in the United States.

The bank sells assets to SPV and receives cash. It transfers assets from its balance sheet to SPV, which will structure it into a bond. SPV issues these bonds to raise funds. They use the funds to pay the purchase of bank assets.

Advertisement

Types of securitization instruments

The issuer can use any asset as long as it generates cash flow. The most common example is a mortgage. Mortgage securitization is known as mortgage-based securities (MBS).

Not only mortgages, but issuers can also use cash inflows from several assets. Examples are car loans, student loans, toll-road revenues, accounts receivable, credit card financing, equipment rental, etc. Bonds with underlying non-mortgage assets are called asset-backed securities (ABS).

Benefits of securitized bonds

Securitized bonds allow originators to increase their operational leverage. The originators’s cash flow does not decrease since it does not pay bondholders using internal cash instead of from installments of mortgage loans.

By transferring assets and receiving cash flow, the originator’s liquidity increases. Therefore, they can provide loans at lower interest rates. Cheaper loans ultimately encourage increased economic growth.

Meanwhile, for intermediaries such as SPV, they benefit from the spread, which is the difference between the interest rate incurs when buying assets from a bank and the interest rate on bond issuance.

For investors, securitized bonds offer alternative diversification. They obtain a fixed source of income other than conventional fixed income sources, such as government bonds and corporate bonds.

Economic Growth and Economic Development: Their Differences and Relationships

Economic growth has a close relationship with economic development. We need economic growth to support

Economic Growth: Factors, Importance, Impacts, How to Measure It

Economic growth refers to an increase in output in an economy over time. It can be short term or long term. In the short

Gini Coefficient: Meaning, Calculation Method, Data, Pros, and Cons

What's it: Gini coefficient is a statistic of economic inequality in a society. It tells you the distribution of income

Advertisement

Needs: Definition, Example, Type

What's it: Needs means requiring something because it is essential. For example, we need food, water, and shelter

Wants: Definition and Examples

What's it: Wants are hopes to have or fulfill something. If we want something, we expect to be able to buy it and

Venture Capital: How It Works, How It Makes Money, Investment Horizon

What's it: Venture capital is capital invested in a new company, startup, or young company, in return for

Private Equity Structure and Fee

Private equity is usually structured as a Limited Partnership (LP) or Limited Liability Company (LLC). Under a

Primary Sidebar

TOPIC

Accounting and Finance Business and Strategy Financial Statements Human Resources Investment Macroeconomics Marketing Microeconomics Operation

Advertisement

LATEST POST

  • Private Equity Structure and Fee
  • Hedge Funds Strategy: Macro, event-driven, relative value, and equity hedge strategies
  • Leveraged Buyout (LBO): How it Works, Funding Sources, Criteria for Target 
  • Private Equity: Examples, Strategies, Targets, Its Ways To Make Money
  • Economic Growth and Economic Development: Their Differences and Relationships
  • Where Do Comparative Advantages Come From?

MOST POPULAR

  • Political Environment: Meaning, Examples
  • Business Size: Definition, Measurement, Classification
  • The Role of Business in Society and the Economy
  • Span of Control: Importance, Types, Advantages, Disadvantages
  • Government Intervention: Examples, Reasons, and Impacts
  • Trade Blocs: Meaning, Types, Pros, and Cons

Footer

SEARCH

POPULAR

  • Political Environment: Meaning, Examples
  • Business Size: Definition, Measurement, Classification
  • The Role of Business in Society and the Economy
  • Span of Control: Importance, Types, Advantages, Disadvantages
  • Government Intervention: Examples, Reasons, and Impacts

TOPIC

Accounting and Finance Business and Strategy Financial Statements Human Resources Investment Macroeconomics Marketing Microeconomics Operation

Copyright © 2023 · About Us  · Privacy Policy and Disclaimer  ·  Terms of Use  ·  Comment Policy  ·  Contact Us