Managing business finance Essay Example | Topics and Well Written Essays - 1750 words - 1

Managing business finance - establish ExampleUsually banks engage in selling CLOs with different tranches that represent various ranks of seniority in terms of reward/ lay on the line profile (Duffie and Garleanu, 2001).CLOs involve three key entities banks, CLO managers, investors and borrowers. Now, in mark to understand how CLOs work it is important to explain the way in which securitisation works. At the very jump a CLO manager approaches various investors in come out to pull up funds from them and use them to vitiate gives (rather issue loans). These funds are pooled in one place sometimes also called as the securitisation fomite which serves as the source of loans for potential borrowers. This vehicle generates interests every month which are paid back to the investors in terms of the riskiness assumed by them. There are various tranches of investments which are graded harmonize to their risk/reward profile (Coval, Jurek and Stafford, 2009). Such as a AAA rated loan is le ss risk and less reward generating security whereas a BB rated loan is higher(prenominal) risk high reward generating security. This nitty-gritty that when the securitisation vehicle generates interest every month, the investor presumptuous the exposure to a highly rated loan (less risky) is paid original but at the cost of a lower interest rate. On the other hand the investor assuming the exposure to a low rated loan (highly risky) is paid at the last but with a high interest rate. The fact here is that there is greater chance for the highly rated securities to pay out the take back whereas there are lesser chances that the low rated investment tranches will generate a return (Antczak, Lucas and Fabozzi, 2011). due to the demand for loans bank managers prefer to issue loans by pooling up funds from different sources in order to share the risk of default. They pool funds from their syndicates which involves (also termed as syndication) other banks, hedge funds and CLO managers. A loan is then divided into