Economics
Four Types of Credit Market Instruments
The four types of credit market instruments are bonds, loans, mortgages, and asset-backed securities. Bonds are debt securities issued by governments or corporations, while loans are agreements between a lender and a borrower. Mortgages are loans secured by real estate, and asset-backed securities are financial instruments backed by a pool of assets such as loans or receivables.
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3 Key excerpts on "Four Types of Credit Market Instruments"
eBook - PDF- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
■ 9.2 Types of Mortgages 249 9.1 THE UNIQUE NATURE OF MORTGAGE MARKETS Mortgage markets exist to help individuals, businesses, and other economic units finance the purchase of a home or other property. Unless you are independently wealthy or rent for the rest of your life, you will probably borrow in the mortgage market to finance the purchase of a home. Before the financial crisis, lenders were very eager to provide mortgage credit. Since the crisis, it has become more difficult to obtain financing, although by 2015 lenders were much more willing to lend. As you will learn in this chapter, the markets for mortgages and mortgage‐backed securities have developed to the point where there is an ample supply of funds for well‐qualified borrowers. Prior to the mortgage crisis in 2007, there was an excess supply of funds available, which led to creating low quality mortgages, called sub- primes, that helped lead to the mortgage crisis. There is a sufficient supply of funds available today, but borrowers must be better qualified than before the crisis. Like other capital market segments, mortgage markets bring together borrowers and suppliers of long‐term funds. Most of the similarities end there, however, because mortgage markets have several unique characteristics. First, mortgage loans are always secured by the pledge of real property—land or buildings—as collateral. If a borrower defaults on the loan, the lender can foreclose and take ownership of the collateral. Second, mortgage loans are made for varying amounts and maturities, depending on the borrower’s needs. Because of their lack of uniform size, individual mortgages are not readily marketable in secondary markets. Third, issuers (borrowers) of mortgage loans are typically small, relatively unknown financial entities. Thus, only the mortgage lender benefits from investigating the borrower’s financial condition fully. In contrast, corporate securities are often held by many thousands of people.
- Jose Cartas, and Artak Harutyunyan(Authors)
- 2017(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
Loans backed by letters of credit and or other trade-related documentation . Trade bills, letters of credit, and other trade-related documents are used to facilitate the lending associated with the acquisition of imports (or sometimes domestic goods). Financial instruments backed by such documentation are classified as loans. Similar arrangements do not exist for deposits. Credit in the form of bankers’ acceptances that are tradable instruments should be classified as debt securities.4.115 Loans made under commitment . Loan commitments, which once were informal credit lines available to corporate customers who kept adequate deposit balances at lending institutions, and are now firm agreements that lay out lending institutions’ obligations to provide credit in the future (including the amount of credit available and the interest rate to be charged), in return for customers’ payments of fees to guarantee the credit availability. All credit extended under informal credit lines or formal loan commitments (including revolving credit arrangements) are classified as loans.Distinction between loans and debt securities
4.116 The defining feature that distinguishes between loans and debt securities is that the former are nonnegotiable financial contracts (evidenced by nonnegotiable documents), whereas the latter are negotiable instruments.42 Loans that become negotiable or tradable should be reclassified from loans to debt securities (see paragraph 4.59). In other words, debt securities should include loans that have become negotiable de facto. These debt securities result from the conversion of loans, with the recording of two other changes in the volume of assets (OCVA) flows, that is, liquidation of the loan and creation of the new debt security (see paragraph 5.21e).E. Equity and Investment Fund Shares [F5]
Equity [F51]
4.117 Equity comprises all instruments and records acknowledging claims on the residual value of a corporation or quasi-corporation after the claims of all creditors have been met
eBook - PDF- John E. Marthinsen(Author)
- 2020(Publication Date)
- De Gruyter(Publisher)
Chapter 10 Real Credit Markets The real credit markets are where funds are borrowed, lent, and invested. The price of these funds is called the “ cost of credit, ” “ interest rate, ” or “ interest yield. ” Borrowers finance projects by demanding credit; lenders and investors earn returns by supplying it. Each currency has its own credit market, but all of them are closely linked by profit-minded participants looking to maximize risk-adjusted returns, minimize risk-adjusted costs, and arbitrage market im-perfections to earn risk-free returns. This chapter begins by clarifying some basic differences between debt and equity markets, money and capital mar-kets, and, finally, primary and secondary markets. It goes on to reinforce the important distinction between real and nominal interest rates and then fin-ishes by explaining how the forces of supply and demand determine the cost of real credit. The Basics Clarifying Financial Markets What are the differences between debt and equity markets, money and capital markets, and primary and secondary markets? Debt Versus Equity Markets Debt markets are where interest-earning securities are bought and sold. Issuers of these securities are borrowers, and buyers are lenders. Interest rates on debt securities can be fixed until maturity or variable, which means they can rise or fall with evolving market conditions. Borrowers have legal obligations to pay both their interest and principal li-abilities promptly. If they fail to do so and default, lenders have first rights to the borrowers ’ liquidated assets. Lenders have no voting rights in debtor com-panies. The most they can earn is the interest rate stated on their securities, which means their compensation is not tied to borrowers ’ performance (e.g., profitability). Equity markets are where stocks (shares) are bought and sold. These share-holdings provide owners with partial ownership rights in the issuing companies. https://doi.org/10.1515/9781547401437-010
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