Securitization

Securitization is the procedure used to transform illiquid assets into securities. An example of securitization is when a group of mortgages are bundled together into an asset pool, which is used as collateral for the issuance of mortgage-backed securities. These securities are then sold to investors. The same approach can be used for credit card debt or general trade receivables. The intent behind securitization is to increase the amount of liquidity in the marketplace while at the same time reducing risk for the original lenders, who can now offload this risk to outside investors.

The underlying asset pool can be subdivided in several ways, so that one tranche may have a higher-return, higher-risk profile, while another tranche has a lower-return, lower-risk profile. These sub-divisions are used to create securities with different profiles that will appeal to different groups of investors.

Related Courses

Corporate Finance 
Treasurer's Guidebook