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Derivative Investment - Essay Example
Author : volkmanterrill
Pages 11 (2761 words)
Quite recently mortgage backed securities have increasingly become the largest investment portfolio of fixed income products. The spread of mortgage backed securities within various investment indices have tremendously increased. Because of the increased visibility and adaptation of mortgages as an attractive investment proposition, several mortgage pricing models have been developed…
The other option available is to default the payment on the mortgage. It may be noted that both of these options are available with the borrower. In this context this paper presents a report on the features of the mortgage in general and an analytical study of the implicit options contained in them through an illustration.
A mortgage bond issue is secured by a lien on the specific assets of an individual or a business corporation - usually fixed assets. The specific property securing the bonds is described in detail in the mortgage which is the legal document, giving the bondholder a lien on the property. As with other secured lending arrangements the market value of the collateral should exceed the amount of the amount lent or the amount of bond issue by a reasonable margin of safety. If the corporation or the individual defaults in any of the provisions of the bond indenture the lender or the trustee on behalf of the bondholders, has the power to foreclose. In a foreclosure the lender or the trustee takes over the property and sells it using the proceeds to pay the amount of debt due to the lender. If the proceeds are less than the amount of bond issue or the loan amount outstanding the bondholders or the creditor become an unsecured creditor for the balance amount. ...