Securitization is a structured finance process, which involves pooling and repackaging of cash flow producing financial assets into securities that are then sold to investors. The name "securitization" is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities.
Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security.
Friday, October 17, 2008
Thursday, October 2, 2008
Top Line and Bottom Line
Top Line
Revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line")
Bottom Line
Net income is informally called the bottom line because it is typically found on the last line of a company's income statement
Revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line")
Bottom Line
Net income is informally called the bottom line because it is typically found on the last line of a company's income statement
Tuesday, September 30, 2008
Credit Rating and Credit Report
A credit rating assesses the credit worthiness of an individual, corporation, or even a country. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan. However, in recent years, credit ratings have also been used to adjust insurance premiums, determine employment eligibility, and establish the amount of a utility or leasing deposit.
A credit bureau (U.S.), or credit reference agency (UK) is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan.
Most consumer welfare advocates advise individuals to review their credit reports at least once per year, in order to ensure that the reports are accurate. Consumers can do so at no cost. They are entitled to a free annual credit report from each of the three nationwide consumer reporting agencies, Equifax, Experian and TransUnion.
A credit bureau (U.S.), or credit reference agency (UK) is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan.
Most consumer welfare advocates advise individuals to review their credit reports at least once per year, in order to ensure that the reports are accurate. Consumers can do so at no cost. They are entitled to a free annual credit report from each of the three nationwide consumer reporting agencies, Equifax, Experian and TransUnion.
What is LIBOR
Libor stands for the London interbank offered rate. It is the interest rate banks charge each other to make overnight loans. Most loans that eventually find their way to you begin at the top with the 16 banks that set Libor. And because banks are increasingly nervous about each others’ financial situation, last night something incredible happened: Libor surged the most ever. It rose more than 4% to 6.88%.
Think about that. The most basic interest rate banks charge each other more than tripled.
If banks are going to charge each other nearly 7% for a one-day loan, it says two things. First, they are scared and not willing to lend money unless they are compensated for the risk. Second, credit is likely to tighten up at your level for cars and other loans.
The move in Libor is equivalent to the interest rate on your credit card soaring from 15% to 45%. You may be willing to put that dinner or pair of Levi’s on the card at 15%, but you will be much less likely to use that credit if you have to pay 45% interest. Banks think and act the same way.
Most consumer loans, including how many ARMs will reset, are tied to Libor in the long run. Interest rates trickle down. Libor can be dull to talk about, but the impact on you is anything but.
Think about that. The most basic interest rate banks charge each other more than tripled.
If banks are going to charge each other nearly 7% for a one-day loan, it says two things. First, they are scared and not willing to lend money unless they are compensated for the risk. Second, credit is likely to tighten up at your level for cars and other loans.
The move in Libor is equivalent to the interest rate on your credit card soaring from 15% to 45%. You may be willing to put that dinner or pair of Levi’s on the card at 15%, but you will be much less likely to use that credit if you have to pay 45% interest. Banks think and act the same way.
Most consumer loans, including how many ARMs will reset, are tied to Libor in the long run. Interest rates trickle down. Libor can be dull to talk about, but the impact on you is anything but.
Exchange Traded and Over the Counter
Exchange Traded and Over the Counter
Exchange Traded
A stock exchange, share market or bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends.
Over the Counter
Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via corporate-owned facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.
Exchange Traded
A stock exchange, share market or bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends.
Over the Counter
Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via corporate-owned facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.
Forward and Future Contract
Forward Contract is an agreement between two parties to buy or sell an asset at a specified point of time in the future. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes.
Futures Contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
Difference between Forward and Future Contracts
While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects:
Futures are exchange-traded, while forwards are traded over-the-counter. Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. Futures are margined, while forwards are not.
Thus futures have significantly less credit risk, and have different funding.
Futures Contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
Difference between Forward and Future Contracts
While futures and forward contracts are both contracts to deliver an asset on a future date at a prearranged price, they are different in two main respects:
Futures are exchange-traded, while forwards are traded over-the-counter. Thus futures are standardized and face an exchange, while forwards are customized and face a non-exchange counterparty. Futures are margined, while forwards are not.
Thus futures have significantly less credit risk, and have different funding.
Options
Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security, or in a futures contract. In other words, the holder does not have to exercise this right, unlike a forward or future.
This tutorial from investopedia gives a clear picture about options.
The primary types of financial options are:
Exchange traded options (also called "listed options") are a class of exchange traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available.
Exchange traded options include:
stock options, commodity options, bond options and other interest rate options index (equity) options, and options on futures contracts
Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution.
Option types commonly traded over the counter include:
interest rate options currency cross rate options, and options on swaps or swaptions.
This tutorial from investopedia gives a clear picture about options.
The primary types of financial options are:
Exchange traded options (also called "listed options") are a class of exchange traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available.
Exchange traded options include:
stock options, commodity options, bond options and other interest rate options index (equity) options, and options on futures contracts
Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution.
Option types commonly traded over the counter include:
interest rate options currency cross rate options, and options on swaps or swaptions.
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