In the investment world, every now and then, new terms or products come up. PTCs, or pass-through certificates, are among the new trending terminologies. Let’s dive deep into it and understand all the hustle about it!

What do you mean by PTCs?

An investor receives a pass-through certificate (PTC) against certain mortgage-backed securities that lie with issuers. In many ways, the certificate is similar to securities issued by banks and other companies (such as bonds and debentures).

Most of these certificates are issued by financial institutions, such as banks, asset management companies, and insurance companies. They offer a wide range of mortgage products to their customers. Investment companies and insurance companies purchase these mortgages so that they can pool them together in a large investment.

How do PTCs work?

When it comes to understanding PTCs, there are a few parties to remember involved in the pass-through certificate transactions: the originator, the SPV (Special Purpose Vehicle), and the investors.

What’s in it for both investors and lenders?

1. PTCs assist lenders in converting illiquid assets into liquid assets that generate cash flow.
2. It makes it easier to move money from the less effective debt market to the more effective capital market.
3. It improves the firm's debt-to-equity ratio.

What are the risks involved at each level?