Question

A) How can firms use hedging to mitigating rising interest rates? B) What is the difference between pledging accounts receivable and factoring accounts receivable? (C) Summarize the asset-backed commercial paper “eco-system” found in the YouTube video. (D) If you were the Chair of the Board of Directors for a large corporation issuing these types of asset-backed securities, what would your perceived advantages be? (E) If you were the buyer (video calls the buyer a “conduit,” what problems might you be concerned about?

Answer 1

A,The most popular strategies to protect against rising interest rates include: ... Buy Floating-Rate or High Yield Bonds: Many individual investors also hedge against rising rates by transitioning their bond portfolios from long-term to short-term bonds, like high yield bonds, or floating rate bonds.

b,difference between pledging accounts receivable and factoring accounts receivables are Pledging accounts receivable allows you to go to a lender and receive a loan using your accounts receivable as collateral. ... Usually this is around 75-85% of the accounts receivable. The difference between pledging accounts receivable and factoring is the lender will not be collecting on your accounts receivable for you.

c An asset-backed commercial paper (ABCP) is a short-term investment vehicle with a maturity date that is typically between 90 and 270 days. A bank or other financial institution typically issues the security itself. The notes are backed by the company's physical assets such as trade receivables. Companies will use an asset-backed commercial paper to fund short-term financing needs.Asset-backed commercial paper (ABCP) is a short-term money-market security that is issued by a special purpose vehicle (SPV) or conduit, which is set up by a sponsoring financial institution. The maturity date of an ABCP is set at no more than 270 days and issued either on an interest-bearing or discount basis.The note is backed by the corporation's collateral, which might include future payments to be made on credit cards, auto loans, student loans, and collateralized debt obligations (CDOs). These expected payments are collectively known as receivables. The proceeds of an ABCP issue is used primarily to obtain interests in various types of assets, either through asset purchase or secured lending transactions.

d Asset backed securities provide originators with the following advantages, each of which directly adds to investor risk: Selling these financial assets to the pools reduces their risk-weighted assets and thereby frees up their capital, enabling them to originate still more loans.

e

Asset-backed securities (ABS) finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans. In one way or another, these asset types represent contractual obligations to pay.

These contractual obligations to pay often rank senior to a borrower’s traditional debt obligations, reducing ABS investors’ exposure to the borrower’s financial health. ABS also has many other investor-friendly features that may help protect against loss and improve liquidity, such as tranching of risk, overcollateralization, and diversity of payers in each underlying pool. Despite these and other strengths discussed in this report, some ABS and other forms of structured credit continue to offer higher yields than similarly rated corporate or municipal bonds. The principal job of ABS investors is to analyze the cash flows from these obligations to assess value and the possibility of loss, rather than relying solely on the current market prices of hard assets, the reputation of a sponsor, or the presence of an investment grade rating.

During the financial crisis, many investors experienced losses related to certain private label residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and MBS-backed collateralized debt obligations (CDOs). In the aftermath of the crisis, the structured credit market underwent a painful yet necessary transformation as market participants soberly returned to conservatism, yet the asset class remains complicated.