Describe some of the relatively new investment instruments derived from securitized debt
What will be an ideal response?
Answer: The oldest form of securitized debt is the mortgage backed bond or agency bond issued by such organizations as the Federal National Mortgage Association. These bonds are known as "pass through" securities because the monthly payments to investors include both interest and a return of principal, which is not taxable income. A major disadvantage of these bonds is that the prepayment of mortgages makes their maturity dates uncertain.
Collateralized Mortgage Obligations (CMOs) are also derived from mortgage pools. Maturities are more predictable because the payments are divided into tranches with the first tranche receiving the earliest prepayments and lower tranches receiving the later prepayments. Falling real estate values and rising foreclosures led to major losses on these securities in the financial crisis of 2007-2008.
Asset Backed Obligations (ABOs) are similar to CMOs but collateralized with a variety of debt such as student loans and auto loans.
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