What is ‘note’
And-note is the highest tranche of an asset, security or other structured financial products. A-note is senior to other notes, like B-notes in bankruptcy, default or other credit proceedings, and paid the first money from the underlying asset. In-notes can be tagged AAA, AA or A, depending on the credit quality of the underlying asset. They can also be referred to as “class a note”.
A note often found in mortgage-backed securities, although they are a component of many different kinds of structured financial products, including those which consist of loans, insurance policies and other debts. These financial instruments are structured so that investors are divided into tranches, each with a different set of risks and benefits.
This structure has become more common as banks and other financial institutions popularized the use of securitization, in which multiple financial assets—some more risky than others-combined in one product. What financial product is divided into tiers, each with a particular level of risk. This allows investors to buy shares of a principal debt pool as the form of bonds. The division into tranches in the future allows investors to choose for themselves the level of risk and reward that suits their purposes; investors said to take less risk, but generally have lower potential returns than the holders of B-notes or C-notes.
For example, investors can buy a note in mortgage-backed securities. Until the underlying loan is, investors in all tranches receive their interest and principal payments on schedule. However, if the borrower default or some other credit business, the investor holds a-first consideration will be given back to the individuals occupying the lower tranches of bonds (which are referred to as subordinate notes). For this reason, notes have a higher credit rating than the corresponding B-notes or C-notes.
Limitations ‘and note’
And-pay attention, offer a higher level of protection than a subordinate notes, as investors in notes, more likely to receive payment even in the event of default or other credit proceedings. However, this increase in security price. But note, tend to make a smaller payment to the investor than B-notes (or notes), because subordinates are the attention of investors compensation for taking additional risk.
In addition, investors in this tranche still need to pay attention to the creditworthiness of the investment in subordinate classes. If the risk level of those investments increase, the probability of default and maturity to grow the risk.