Tuesday, 21 August 2007
The reason behind the drop in stock prices recently
Was wondering why the stock market so volatile was recently…did not know the reason behind it, but today what my prof said enlightened me somehow….
For those who are really into finance, sub-prime housing loans should not be new to you…for e rest, sub-prime housing loans are loans given to people of low credit worthiness to purchase properties….for sub-prime loans, the banks will charge a higher interest rates that the prime housing loans
The banks justified having sub-prime loans by the fact that the US economy was doing well at that time and by law of diversification, it is good for them to have a portfolio of both prime and sub-prime debtors…besides the likelihood of all sub-prime borrowers defaulting on payment at one go is low…however, there is always two sides to a coin…there is no mention of systematic risk(economic recession) and what if the property value drop….
So when they acknowledge the possibility of systematic risk and drop in property value, banks created mortgage bank security(MBS), meaning in the case of any default, the property will be repossessed by the bank….
I thought this was e end, but prof goes on….it does not end here, frm MBS…banks created bonds to sell to investors which will be rated AAA, AA, A and so on…and such bonds will be packaged together w other bonds and debts which is otherwise known as the collateral debts instruments (CDOs)…
So the trouble comes when property value drop…banks did credit freeze when they realize the whole mess of trouble they are in for…direct effect: those w sub-prime loans and those w CDOs that are linked w MBS, contingent (spillover) effect: investors lose confidence and share price drops….
This not just affect US market but also the rest of the world because US is a major player of the market…so it is sub-prime housing loans making all e trouble
SO chimilogy right…roughly know how it works but feel really drained after class…I noe more challenging topics would be on the way…and wat abt my other finance modules? Seems like I hv to get tuned to the finance terminology, stock mkt to be precise juz like how I first struggled w accounts…bless me k =.=
enough abt FIM, gg to read through entreprenurial finance so as not to try to stay in tune w class tml...hopefully, keeping my fingers crossed
For those who are really into finance, sub-prime housing loans should not be new to you…for e rest, sub-prime housing loans are loans given to people of low credit worthiness to purchase properties….for sub-prime loans, the banks will charge a higher interest rates that the prime housing loans
The banks justified having sub-prime loans by the fact that the US economy was doing well at that time and by law of diversification, it is good for them to have a portfolio of both prime and sub-prime debtors…besides the likelihood of all sub-prime borrowers defaulting on payment at one go is low…however, there is always two sides to a coin…there is no mention of systematic risk(economic recession) and what if the property value drop….
So when they acknowledge the possibility of systematic risk and drop in property value, banks created mortgage bank security(MBS), meaning in the case of any default, the property will be repossessed by the bank….
I thought this was e end, but prof goes on….it does not end here, frm MBS…banks created bonds to sell to investors which will be rated AAA, AA, A and so on…and such bonds will be packaged together w other bonds and debts which is otherwise known as the collateral debts instruments (CDOs)…
So the trouble comes when property value drop…banks did credit freeze when they realize the whole mess of trouble they are in for…direct effect: those w sub-prime loans and those w CDOs that are linked w MBS, contingent (spillover) effect: investors lose confidence and share price drops….
This not just affect US market but also the rest of the world because US is a major player of the market…so it is sub-prime housing loans making all e trouble
SO chimilogy right…roughly know how it works but feel really drained after class…I noe more challenging topics would be on the way…and wat abt my other finance modules? Seems like I hv to get tuned to the finance terminology, stock mkt to be precise juz like how I first struggled w accounts…bless me k =.=
enough abt FIM, gg to read through entreprenurial finance so as not to try to stay in tune w class tml...hopefully, keeping my fingers crossed
i look upon the moon and stars at Tuesday, August 21, 2007
2 stars were shining bright even without the moon
2 stars were shining bright even without the moon