In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. We show that subdividing a bond issued against given collateral into subordinated tranches can yield significant profits under the hypothesised pricing system. Increasing the systematic risk or reducing the total risk of the bond collateral increases the profits further. The marketing gain is generally increasing in the number of tranches and decreasing in the rating of the lowest rated tranche.

No abstract

Securitization, Middle market transactions, Mezzanine loans, Medium-sized enterprises, Junior tranche, G10, G21, G24,

Several policy options have been discussed to mitigate the current subprime mortgage crisis. This paper analyses an interest rate freeze on adjustable rate mortgages as one possible reaction. In particular, the implications on Residential Mortgage Backed Securities (RMBS) are studied. We examine shifts in the underlying portfolio’s discounted cash flow distributions as well as changes in the payment profile of RMBS-tranches. We show that the positive effects of a rate freeze, e.g. less foreclosures and a stabilizing housing market, can outweigh the negative effect of lower interest income such that investors might be better off

No abstract