- A promissory note is a written promise to pay a specified sum of money to a specified party under conditions mutually agreed upon.
- In the context of securitisation, a promissory note is a type of debt security that is used to represent the underlying assets in a securitisation.
- The promissory notes are typically issued by a special purpose vehicle (SPV) that is created to hold the underlying assets.
- The promissory notes are then sold to investors, who receive regular interest payments and the principal amount of the note at maturity.
There are a number of applications of promissory notes in securitisation, including:
- To represent the underlying assets: The promissory notes represent the underlying assets in a securitisation. This means that the investors in the promissory notes have a claim on the underlying assets.
- To provide liquidity: The promissory notes provide liquidity to the securitisation. This means that the investors in the promissory notes can easily sell their investments if they need to.
- To reduce risk: The promissory notes can help to reduce the risk of a securitisation. This is because the promissory notes are typically secured by the underlying assets.
Here are some examples of how promissory notes are used in securitisation:
- Mortgage-backed securities: In a mortgage-backed security, the underlying assets are mortgages. The borrowers on the mortgages make monthly principal and interest payments to the issuer of the securitisation. The issuer then uses these payments to pay the interest on the promissory notes and to repay the principal of the promissory notes at maturity.
- CDO: In a collateralized debt obligation, the underlying assets can be a variety of debt instruments, such as mortgages, corporate bonds, and loans. The borrowers on the underlying assets make monthly principal and interest payments to the issuer of the CDO. The issuer then uses these payments to pay the interest on the promissory notes and to repay the principal of the promissory notes at maturity.
Promissory notes are an important asset class in securitisation, and they can be used to create a variety of securitisation products.