What is securitization? What are its advantages to borrowers? What are its advantages to lenders?

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What is securitization? What are its advantages to borrowers? What are its advantages to lenders?

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What is securitization? What are its advantages to borrowers? What are its advantages to lenders?

Explanation & AnswerSolution by a verified expert

Explanation

Securitization is a process of converting financial assets or debts into financial securities, that is, different financial assets or debts of a company are pooled into a single financial instrument. This financial instrument is then issued to the investors to raise capital and enhance liquidity of the company.
Securitization can take place in two ways:

Debt securitization: Under debt securitization, a company pools its various debts into a single financial instrument tradeable in the market.
Asset backed securities: Under asset backed securities, a company pools its various assets into a financial instrument tradeable in the market.

Advantages of securitization for lender:

The company or bank can raise additional capital and increase its market size through securitization.
Securitization enhances the liquidity of an issuing firm by converting illiquid assets into liquid ones.
Securitization connects the financial market with the capital market by converting financial assets into financial securities, thereby reducing the intermediate cost.

Advantages of securitization for borrower:

Companies provide attractive and valuable options to the investors with diversification of securities in the portfolios.
Companies offer cheaper finance, flexible interest rates, more choice and less processing time of securities to the investors so that the investors have wider choice to invest their savings which require minimal time and formalities.

Verified Answer

Securitization is a process of converting financial assets or debts into financial instruments which are then issued to the investors as a part of the company's stock.
Advantages of securitization for lenders are:

Securitization fulfil the additional capital requirements of a firm.
Securitization enhances the liquidity of the firm.
Securitization connects the financial market with the capital market.

Advantages of securitization for borrowers are:

Firms over attractive portfolios to the investors.
Investors have a wide choice to make investments due to the large competition in the market.

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