Listen to a Business English Dialogue About Residual security
Zoey: Hi Eden, have you heard about residual security?
Eden: No, I’m not familiar with that term. What does it mean?
Zoey: Residual security refers to the portion of an asset’s value that remains after all liabilities have been paid off, often seen in the context of asset-backed securities or mortgage-backed securities.
Eden: Oh, I see. So, it’s like the leftover value that belongs to the security holders after all debts have been settled?
Zoey: Exactly. It represents the equity or ownership interest that investors have in the underlying assets, once all other claims have been satisfied.
Eden: That makes sense. Are there any risks associated with investing in residual securities?
Zoey: Yes, there can be risks, especially if the underlying assets perform poorly or if there’s a high level of default among borrowers.
Eden: I see. So, investors in residual securities are essentially taking on more risk compared to other types of securities?
Zoey: Yes, that’s correct. Because residual securities are typically the last to be paid in the event of a default, they carry higher risk but also the potential for higher returns.
Eden: That’s good to know. How are residual securities priced in the market?
Zoey: Residual securities are often priced based on the expected cash flows from the underlying assets and the perceived level of risk associated with those cash flows.
Eden: I understand. So, investors analyze the underlying assets and their potential performance before determining the value of residual securities?
Zoey: Yes, exactly. It’s important for investors to conduct thorough due diligence and assess the creditworthiness of the underlying assets when investing in residual securities.
Eden: Thanks for explaining, Zoey.
Zoey: No problem, Eden. Understanding residual securities can help investors make more informed decisions in the financial markets.