Sub Prime loanIt is a loan which does not comes under prime loan. For this type of loan bank charge more Interest rate than the normal prime loan, i.e. such loan don’t required any Good Guarantees.
Why People go for such loan
When people don’t have any option to pay their liability then they go for either Credit Card Payment or Sub-Prime Loan. And here Sub-Prime Loan is the better option
What is risk with these types of loan
The sub-Prime loan has the maximum Repayment default risk, because there are against very less or no mortgage (Sub-Prime Mortgage).
Why do Bank Lend Sub-Prime Loan
Bank Charges good amount of interest rate from the customer.
What is Sub-Prime MBS
Bank sell their asset ie Sub-Prime Mortgage in the market by converting them into security, Same as Bonds. This is called as Sub-Prime Mortgage Back Security.
How Bank Makes MBS Fund
Bank collect all loan including Prime and sub Prime Loan and form a fund and issue the bond to the corporate and other banks. The ratio of the prime and sub prime loan is depending on the Riskyness of the bonds.
Why do Corporate Invest in such MBS
The Yields of such Bonds are very high.
What is problem of Sub prime in US and UK
Lots of leading banks from their respective Country have the huge position in such type of Bonds. The sub prime Market in the US and UK crashed very badly. Due to which banks had to seize their investment because they were not able to value their investment, i.e. no Buying or selling in such investments. Which lead to lack of money supply (Liquidity) into the financial system. Due to which all global equity and debt market around the world face the crash.
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