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Securities supported by cash flows from a pool of underlying assets, such as loans or receivables.
Borrowers make payments that are collected and distributed under the security's rules. Some structures divide securities into tranches with different priorities: senior investors receive payments first, while junior investors absorb specified losses earlier. Fees and reserve arrangements can also affect distributions. Pooling many loans spreads some individual risks but does not prevent losses when borrowers face a common economic shock.
Suppose a simplified loan pool supports J$8 million of senior securities and J$2 million of junior securities. If the structure allocates its first J$1 million of losses to the junior tranche, that tranche loses half its principal while the senior principal is initially unaffected. A further loss can eventually reach senior investors. The same pool therefore creates investments with different risk profiles.
ECB survey finds easier wholesale credit terms, with financing costs mixed