Mortgage bonds are considered a popular investment asset in developed countries, but in our country they are still perceived as a novelty. These securities are gradually gaining popularity, they are bought by competent market participants, while conservative businessmen miss a good opportunity for enrichment. In today’s article we will consider the essence of mortgage bonds.
Every professional investor should know what it is and how to use this tool in practice. Having obtained new knowledge, a person will be able to act in a more organised manner, to achieve the set goals.
What are mortgage bonds? Who needs them?
In our country, the securities market is at the beginning of its development. Many citizens have very little knowledge and do not seek to improve their financial literacy. They use a limited set of financial assets or prefer to refuse to work on the international market.
It is up to each individual to decide which financial instruments and behavioural strategies to use. Knowledge about available commodities and various securities will help to choose the best option and achieve high results. New ways of enrichment are constantly emerging on the world market, and it will be useful for a trader to study the incoming information.
Mortgage bonds are, in simple words, the product of a bank issue secured by mortgage payments. The financial institution finances the issuance of loans that are pooled together. The rights of the holders to receive cash payments are then structured, and a CB is issued on their basis. The profitability of the financial instrument is ensured by mortgage payments. The procedure of re-sale of debt obligations in the form of securities is called securitisation.
Issuance of SS is very favourable for the bank. It allows to fix the profit received, formed at the expense of mortgage interest and paid on debt securities. The received funds can be used for registration of new loans and multiplication of bank capital. The organisation increases the turnover of its assets and maximises the profit generated.
For the capital holder, mortgage bonds are securities with a long-term investment period. The reliability of this instrument is at a fairly high level, because even if the home buyer stops paying loan obligations, his debt will be repaid by selling the property. In the worst case, the flat is sold at auction, after which the bank fulfils its obligations to the investor.
Another advantage of such investments is the high yield of mortgage bonds. The crisis dictates its own rules and in order to survive in a difficult economic situation, the market participant must select the safest assets with high profitability.
The disadvantage of such securities is the uncertainty of payment flows. The borrower may repay his debt early, resulting in an unplanned repayment of part of the par value. In this case, the investor will be forced to reinvest the amortised amount, after which transaction costs will increase and the return on investment will be reduced.
Types of mortgage bonds
Specialists distinguish three types of securities. Depending on their potential and goals, the investor will choose the best option. Mortgage bonds are of several types:
- Balance sheet PPIs are standard securities that assume additional collateralisation by a pool of mortgages. The mortgages remain on the balance sheet of the financial institution. The investor must consider not only the credit risk, but also the possibility of bankruptcy of the issuer itself.
- Multi-tranche SSIs (structured) are a pool of loans securing several issues. Securities are issued in the form of several tranches: senior and junior. Holders of the first variant of securities have priority for receiving payments. All other holders of securities can count on money only at full repayment of debt. Thus, the younger the tranche, the lower its yield and higher the potential risks.
- Single-tranche mortgage bonds represent a pool of loans, which provides only one issue of securities. This scheme of placement of mortgage bonds is considered to be classical.
In addition to the types described above, there is a mortgage participation certificate on the market. This instrument is similar in many ways to a unit in a mutual fund, but differs in the absence of a management company and a portfolio of securities. Instead, the client has a number of mortgage bonds. The price chart can be monitored for each individual security. The investor will draw conclusions about the profitability of such an instrument and will eventually make a decision about its practical use. Every participant of the modern marketplace can buy mortgage bonds. At the same time, you should not make hasty decisions. Before entering the world exchange is recommended to check the reliability of the credit organisation, its reputation among clients.
At the moment in the Internet you can find many manuals on mortgage bonds for dummies. The securities market is gradually developing, attracting new adherents and users. Investors all over the world are searching for reliable instruments with a high level of profit. Securities are a good option for those who are able to analyse the activities of banking structures and want to ensure stable payments.
Having received detailed information about available investment assets, a speculator can purchase mortgage bonds. It is possible to buy these securities through a large bank. It is better to choose a reliable company with a rich history, reducing the associated risks and increasing your chances of enrichment.
