A Pass Through Certificate (PTC) is a certificate that is given to an investor against certain mortgaged-backed securities that lie with the issuer. The certificate can be compared to securities (like bonds and debentures) that may be issued by banks and other companies to investors. The only difference being that they are issued against underlying securities.
The interest that is paid to the issuer on these securities comes to the investor in the form of a fixed income. Investors in such instruments are usually financial institutions like banks, mutual funds and insurance companies. However, to understand this better, you need to delve a little deeper into how exactly the assets are securitised.
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What is securitisation?
Many banks and private organisations have incomes or receivables that are due to them in lieu of loans or services that they have offered in the past. Securitisation involves the conversion of these incomes or receivables into debt instruments which are then sold to investors. For this purpose, the parent organisation sets up a Special Purpose Vehicle (SPV) which issues these debt instruments. By making these debt instruments available in the markets, the organisation manages to make their assets liquid and can then use the funds for some other productive business. When an investor buys these debt instruments, the investor is given a PTC. However, this does not mean that the investor owns the assets. Rather, when the original lender recovers money from the original borrower (as interest or otherwise), it is then passed on to the SPV, which then disburses it to the investor in the form of a fixed income.