Residual income unit (RIU) is a type of security that represents the residual interest in the cash flows from a securitisation. RIUs are typically issued by the sponsor of the securitisation. RIUs are more risky than other types of securities issued in a securitisation, but they also offer the potential for higher returns.
The cash flows from a securitisation are typically divided into two tranches:
- Senior tranches: These tranches receive priority over the RIU in terms of cash flow payments.
- RIU: This tranche receives any remaining cash flows after the senior tranches have been paid.
If the underlying assets of the securitisation perform well, the RIU will receive a significant amount of cash flow. However, if the underlying assets perform poorly, the RIU may not receive any cash flow at all.
RIUs are an attractive investment for investors who are looking for high returns but who are also willing to accept high levels of risk.
Here are some applications of RIU in securitisation:
- Mortgage-backed securities: In a mortgage-backed security, the RIU typically represents the residual interest in the cash flows from the underlying mortgages.
- Collateralized debt obligations: In a collateralized debt obligation, the RIU typically represents the residual interest in the cash flows from the underlying debt securities.
RIUs are a complex financial product and there are risks associated with investing in RIUs. Investors should carefully consider the risks before investing in RIUs.