By Kenneth Trester
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Additional resources for 101 Option Trading Secrets
The security is sold to a dealer who will structure the MBS into a collateralized-mortgage obligation (CMO) or sell the MBS outright to a number of investors. In the course of the securitization, the mortgage banker and the dealer will work with a number of parties including lawyers, accountants, and rating agencies. Each of these parties will receive compensation for its services. Generally, they are paid up-front fees that effectively come from the difference between the sale price to the investors and the proceeds to the borrowers.
In a securitization, several classes of securities may be created and sold to investors. The issuer may retain other classes. Frequently, the issuer retains the most junior class, or the residual interest, in the transaction. This retained class can be thought of as the equity of the transaction. Viewing the transaction as a sale, the issuer must determine whether the proceeds from the securitization, after taking into account the value and risk 15 16 INTRODUCTION TO SECURITIZATION of the retained classes, represents greater value than an outright sale of the loans.
XYZ has equity equal to 10 percent of its assets. XYZ estimates its cost of capital by taking the weighted average of the components of its liabilities. On this basis, XYZ might be encouraged to sell or securitize whenever the cost of securitization is less than the cost of capital. 2). 35 Liabilities ($000) Short-term debt Long-term debt Equity Debt + Equity a Weighted average cost of capital. Fundamentals of Structuring 19 proceeds of $190 million. 5 percent (based on the yields of the bonds and expenses).