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What are a Notes?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 September 2016
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    2003-2016
    Conjecture Corporation
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A notes are a group or tranche of securities that provide some type of benefits not found with other classes of notes. Typically, A notes are groups of either mortgage-backed or asset-backed securities that are bundled for the purposes of sale to investors. An investment opportunity of this type often provides additional benefits that are not found with similar groups of assets, in that investors are usually granted priority when it comes to the repayment of the principal.

There are several advantages associated with A notes in comparison to other investment options, including the class B note. Typically, an investor who is holding A notes has seniority on several fronts. This means that the holder of A notes is likely to receive interest payments and repayment of the original investment before investors holding lesser notes are provided with any compensation. Investors willing to invest in these types of notes are also often granted more liberal credit terms, a benefit that is sometimes very attractive to investors who would prefer to use the credit option rather than tying up a significant amount of available cash to secure the notes.

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It is important to keep in mind that A notes are only as good as the securities that are included in the tranche. This means that while this approach is often considered a good investment strategy, the investor still needs to investigate the background of the assets included in the deal. For example, if the A notes are associated with a group of mortgage-backed securities, getting some background on those securities and the stability of the mortgages involved is a good idea. Doing so will help the investor determine if the level of risk involved is worth the projected returns associated with the investment.

While there is some degree of risk associated with A notes, that risk is often considered somewhat low in comparison to volatile stock offerings and several other investment types. Provided that the general state of the economy will support the securities associated with the notes, the chances of recouping the principal and earning at least some profit from the venture are excellent. For example, if the economy is stable, the mortgage-backed securities involved will also remain stable, since the possibility of default on the underlying mortgages remains relatively low. As long as this type of economic climate prevails, the investment will likely produce sufficient returns for the investor to find the purchase of the A notes worth the time and effort.

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