In: Finance
Explain in depth what mortgage securitization is
Explain why we have money markets and their overall purpose
Explain quotes in the T bill secondary market. In big terms
1). Mortgage securitization - Securitization is a process in which different types of debt such as commercial or residential mortgages, loans given for vehicles or credit card are pooled together to form a security and is then sold to investors who will receive the future cash flows from that security. In mortgage securitization, the security is formed by pooling together mortgages, hence, the name, mortgage securitization.
2). Money market is part of the financial market where short-term financial transactions take place. These transactions have a maximum maturity period of one year. It is here that selling, buying and lending of short-term securities happens. Money market securities are T-bills, commercial paper, CDs, money funds, municipal notes, forex swaps, repurchase agreements and federal funds, to name a few. The main purpose of a money market is to provide high liquidity for very short-term securities.
3). Consider the following T-Bill quote:
ISSUE | Bid | Ask | Change | Yield |
11/23/2019 | 6.08 | 6.06 | -0.04 | 6.25 |
The date under issue is the date of maturity of the T-Bill. The bid is the interest rate which a buyer wants and ask is the interest rate which a seller is willing to pay. In order to determine the bid and ask prices, the respective rate is multiplied by the number of days till maturity, divided by 360 days. The result is then deducted from the face value of the T-Bill (usually $10,000) to arrive at the respective bid or ask price.
The number under change gives the difference between today's bid and yesterday's bid, in basis points. Yield is based on the ask interest rate and is the annualized return which one would earn on the T-Bill if it is held till maturity.