9ed FIN421 PP_CH001

Are placed into a pool and new securities are issued

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Unformatted text preview: oreign exchange Diversification to improve performance Instruments and vehicles continue to Instruments develop (WEBs) develop Information and analysis improves 1-39 Key Trends - Securitization • Loans of a given type such as mortgages are placed into a ‘pool’ and new securities are issued that use the loan payments as collateral. that • The securities are marketable and are purchased The by many institutions. by “Shadow banking system” • End result is more investment opportunities for End purchasers, and spreading loan credit risk among more institutions more 1-40 Securitization – Cont. Securitization has grown rapidly due to Securitization • Changes in financial institutions and regulation Changes permitting its growth, particularly lower capital requirements on securitized loans, requirements • Improvement in information capabilities, • Credit enhancement provided by pool issuers has Credit improved marketability. improved 1-41 Figure 1.1 Asset-backed Securities Outstanding 1-42 Key Trends Financial Engineering Repackaging cash flows of a security to enhance Repackaging marketability (carried out by Financial Intermediaries) Financial Bundling and unbundling of cash flows o Bundling: Bundling: Combining more than one asset into a composite security, for example securities sold backed by a pool of mortgages. of o Unbundling Selling separate claims to the cash flows of one Selling security, for example a CMO security, 1-43 Computer Networks Online low cost trading Information made cheaply and widely Information available available Direct trading among investors via Direct electronic communication networks electronic 1-44 The Future Globalization will continue and investors will Globalization have far more investment opportunities than in the past in Securitization will continue to grow after the S...
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