asset-backed securities

Examples of asset-backed securities in the following topics:

• Other Types of Bonds

  • Other bonds include register vs. bearer bonds, convertible bonds, exchangeable bonds, asset-backed securities, and foreign currency bonds.
  • Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets.
  • Examples of asset-backed securities are mortgage-backed securities (MBS's), collateralized mortgage obligations (CMOs), and collateralized debt obligations (CDOs).
  • The main examples of subordinated bonds can be found in bonds issued by banks and asset-backed securities.
  • The senior tranches get paid back first, the subordinated tranches later.

• Types of Risk

  • There are many types of financial risk, including asset-backed, prepayment, interest rate, credit, liquidity, market, operational, foreign, and model risk.
  • Asset-backed risk affects investments in asset-backed securities such as home loans.
  • Interest rate risk refers an asset whose terms can change over time, such as a Variable Rate Mortgage payment.
  • Liquidity risk is the risk that an asset or security cannot be converted into cash in a timely manner.
  • Classify different securities by the types of financial risk associated with the investment opportunity

• Secured vs. Unsecured Funding

  • A secured loan is a loan in which the borrower pledges an asset (e.g. a car or property) as collateral, while an unsecured loan is not secured by an asset.
  • A  car loan is a secured loan in which the collateral is an automobile, If the borrower does not pay back the car loan within the agreed upon terns, the lender may seize the automobile.
  • A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral.
  • Unsecured loans are monetary loans that are not secured against the borrower's assets.
  • In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets.

• Acid Test Ratio

  • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
  • Quick assets include the current assets that can presumably be quickly converted to cash at close to their book values.
  • The numerator of the ratio includes "quick assets," such as cash, cash equivalents, marketable securities, and accounts receivable.
  • The acid-test ratio is calculated by adding cash, cash equivalents, marketable securities, and accounts receivable.
  • A company with a quick ratio of less than 1 cannot currently pay back its short-term liabilities.

• Pricing a Security

  • The price of a security is the market determination of the value of the underlying asset.
  • The price of a security reflects the value of the asset underlying it.
  • Therefore, the market price for a security indicates the consensus value placed on its asset by all the buyers and sellers in the market.
  • The choice of which method to use depends in part on what kind of security one is valuing.
  • This is because if you have a dollar today, you can do all kinds of things with it: invest it, use it to buy something you want, or pay back a debt.

• The Fed's Balance Sheet

  • The Fed has two important assets: government securities and discount loans.
  • Usually the Fed buys and sells U.S. government securities.
  • When the Fed buys U.S. government securities, we call it an open-market purchase because the Fed's assets increase, expanding the monetary base.
  • The Fed can sell U.S. government securities, called an open-market sale.
  • A Fed check is not backed by money per se.

• Quick Ratio (Acid-Test Ratio)

  • Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values.
  • A company with a Quick Ratio of less than 1 cannot pay back its current liabilities.
  • Quick Ratio = (Cash and cash equivalent + Marketable securities + Accounts receivable) / Current liabilities.
  • Cash and cash equivalents are the most liquid assets found within the asset portion of a company's balance sheet.
  • Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper.

• The Fed's Balance Sheet

  • Securities are the largest holdings of the Fed's assets, and they consist of U.S. government securities: T-bills, T-notes, and T-bonds.
  • The Federal Reserve held $1.7 trillion in securities in 2012.
  • Mortgage-Backed Securities: The Federal Reserve purchased mortgage securities from the commercial banks and public corporations during the 2008 Financial Crisis.
  • The Fed purchased $835 billion in mortgage-back securities, removing the bad loans from the banking industry.
  • Mint, making it an asset.

• Types of Long-Lived Assets

  • The two major asset classes are tangible assets (e.g., buildings and equipment) and intangible assets (e.g. copy rights).
  • Tangible assets include fixed assets, such as buildings and equipment.
  • Intangible assets includes non-physical resources and rights that a firm deems useful in securing an advantage in the marketplace.
  • They usually consist of three possible types of investments: investments in securities (such as bonds), common stock, or long-term notes.
  • They are listed under the asset portion of the balance sheet.

• The Relationship Between Risk and Return and the Security Market Line

  • The security market line is useful to determine if an asset being considered for a portfolio offers a reasonable expected return for risk.
  • The CAPM is a model for pricing an individual security or portfolio.
  • For individual securities, the security market line (SML) and its relation to expected return and systematic risk (beta) depicts an individual security in relation to their security risk class .
  • Individual securities are plotted on the SML graph.
  • The security market line depicts the the return on a security relative to its own risk.