i) Securitization is a fairly recent financial innovation that involves bringing together homogeneous,
illiquid financial or physical assets and then transforming them into marketable securities. The
financial assets that are transformed in this way are normally intangible claims to benefits such as
loans held eg. (residential mortgage commitments) and (cpy rights).
Securitization normally involves the setting up of a special-purpose vehicle, which will buy the
asset from the owners and will then undertake the issue of securities (eg. 10 years – fixed rate
bond) to the market. The bonds will be serviced by the income received from the underlying
assets and on the maturity of the bonds, the amounts owing may be repaid in various ways
including the income generated from the underlying assets, the issue of new bonds or by the
repayment of the underlying claims.
ii) Securitization may be of benefit to a business in reducing risk eg. where a bank has been engaged
in heavy borrowing to a particular sector of industry ti may reduce its risk by selling some of the
loans through a securitization issue. The result of such a move will also lead to releasing tied-up
capital and may enable the bank to use the capital for more profitable purposes.
Securitization can also be helpful to a business in overcoming short-term cash flow problems as
the sale of the assets results in an immediate injection of funds.
Investors may find a securitization issue attractive because the securities are
marketable Marketable and the underlying assets provide good security.
Kavungya answered the question on April 20, 2021 at 09:39
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The following...(Solved)
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