25 years: Securitisation
In this video, Ian will discuss how to assess the risks of a bond and its value as it changes over time and he will focus more on aspects of market risk and liquidity risk.
In this video, Ian will discuss how to assess the risks of a bond and its value as it changes over time and he will focus more on aspects of market risk and liquidity risk.
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17 mins 16 secs
The market risk process consists of assessing duration and YTM changes, and how it is likely to impact mark-to-market volatility. Secondly, whether there is an instrument or practice that will allow us to hedge, or otherwise, manage that volatility. Lastly, assess the liquidity risks, in particular economic conditions or poor transaction performance.
Key learning objectives:
Identify the market risks relating to duration, MTM and liquidity
Explain the ways to hedge against these risks
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YTM - Yield to Maturity, the annualised returns an investor can expect over the life of a bond
Macaulay Duration - The weighted average time to maturity of the cash flows of a bond. This is a useful concept for CLOs as they do not have bullet repayments, but which are instead paid down over time as cash is received on the underlying portfolio.
The underlying loans are not mark-to-market on the CLO balance sheet. CLOs have committed funding (the bonds issued) for the full life of any underlying assets in their portfolios. The CLO Manager is therefore never forced to sell a loan in a bad market environment, which means they are never forced to crystalise a MTM loss. This is also one of key reasons there were so few CLO bonds that defaulted in the credit crisis.
However, where an investor has to MTM their own portfolio, and is paid fees based on the value of that portfolio, or even could be forced to sell assets because of funding requirements, this is a key risk.
Liquidity on a number of levels:
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