Discuss managing interest rate by using loan sales and securitisation.(Minimum 300 words and no plagiarism ,...

Discuss managing interest rate by using loan sales and securitisation.(Minimum 300 words and no plagiarism , please)

Expert Solution

Managing interest rate using loan sales and Securitisation

Securitisation

The securitization process helps the banks to better manage the interest rate risk.For instance, if there are long term loans with fixed interest rate which are not yet securitized, eventual changes of the interest rate may cause a huge loss to the bank. A loan sale generally arises when a financial institution originates the loan and subsequently sells it.

Financial intermediary generally uses loan sales and securitization to hedge the credit and the interest rate systematically. Loan securitization refers to the packaging and selling of loans and other assets backed by the securities as issued by a financial intermediary.

Loan sales

Loan sales refers to the sale of a loan which was originated by a bank with or without a recourse.

Recourse means the ability of the buyer of a loan to sell the loan back to the originator under a worst case scenario.

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