What is behind OR basic concepts of “Easy Invest”
New products entering the market often bring new forms of investment as well as rules and conditions. Debitum always encourages its clients and partners to read up on what is new and to be familiar with basic concepts and what they mean.
Structured products are usually offered by banks and investment brokers and are pre-packaged investments that normally include two or more assets linked to interest plus one or more derivatives sometimes. Generally tied to an index or basket of securities, structured products are designed to facilitate highly customised risk-return objectives. The financial return is derived from the performance of the underlying assets. The initial investment is repaid in full, and anything more is dependent on the performance of the underlying assets.
Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace. A marketable financial instrument is created by merging or pooling various financial assets into one group. This group of repackaged assets is made available to investors. Securitization is most often associated with loans and other assets that generate receivables such as different types of consumer or commercial debt.
The company holding the assets (the originator) collects the data on the assets it would like to remove from its associated balance sheets. This then becomes a reference portfolio, which is then sold to an issuer who creates securities to trade with. These securities are in fact stakes in the portfolio’s assets, which investors can buy for a specified rate of return.
The portfolio is often split into tranches (portions) and the tranches differ according to what they contain and as a result, offer varying amounts of risk.
Tranches that contain assets with a higher credit rating are known as senior tranches. They are deemed the least risky and any losses on the value of the security are only experienced in the senior tranche once all other tranches have lost all their value. As a result, senior tranches pay the lowest rate of interest. Consequently, a junior tranche has the most risk but pays a higher return on the initial investment.
The success of any investment depends on the performance of the particular business loan. So while investment can grow in value it can also depreciate in value based on the economic situation of the country in which the borrower or loan originator is situated.
The Loan Originator has to provide 100% collateral coverage particularly in the event that the borrower is unable to repay the loan. Although buyback is desirable, it is not guaranteed, as it is also dependant on the financial situation of the loan originator.
Disclaimer: Investments in financial products are subject to market risk and any investment should only be done with risk capital. The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.