What Is a Long-Dated Asset?
A long-dated asset is a type of income-generating asset, such as residential mortgages and 30-year bonds, where the revenue streams occur until that asset's maturity date (which is well into the future).
Key Takeaways
- A long-dated asset is a type of income-generating assets—such as residential mortgages and 30-year bonds—where the revenue streams occur until that asset's maturity date (which is well into the future).
- Pension funds and insurance companies invest in long-dated assets to match their long-term obligations.
- Long-dated assets carry greater duration risk.
Understanding a Long-Dated Asset
Institutional investors, such as pension funds and insurance companies, invest in long-dated assets to match their long-term obligations. They may purchase residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), 30-year corporate bonds, municipal bonds, and Treasury bonds, as well as other long-dated assets, in order to receive ongoing cash flows to meet their payment obligations. These assets can either be traded away for other long-term investment substitutes or held to maturity.
Long-dated assets carry greater duration risk. If a holder of long-dated assets employs a liability-matching strategy and interest rates rise, the fixed interest income stream that the holder receives over many years may not cover the long-dated liabilities.
For example, banks generally hold long-dated assets such as residential mortgage-backed securities. Banks also have interest-sensitive liabilities, such as demand deposits from savings accounts. Since the income generated by mortgages tends to be steady over the life of the loans, the amount of money the bank receives from mortgages is limited to the rates that prevailed at the time of the loan origination.
However, cash outflows from demand deposits are not generally limited and will increase in a rising interest rate environment. The result would be a reduction in net interest margin for the bank and possibly financial distress if the mismatch between long-dated assets and liabilities is severe enough.
Types of Long-Dated Assets
Residential Mortgage-Backed Securities (RMBS)
Residential mortgage-backed securities (RMBS) are a type of debt-based security that is backed by the interest paid on loans for personal or family residences. The interest on loans such as mortgages,home-equity loans,andsubprimemortgages is considered to be something with a comparatively low rate of default and a comparatively high rate of interest, since there is a high demand for the ownership of a personal or family residence.
Commercial Mortgage-Backed Securities (CMBS)
Commercial mortgage-backed securities (CMBS) are fixed-income investment products that similar to residential mortgage-backed securities but they are backed by mortgages on commercial properties rather than residential real estate. The underlying securities of CMBS may include a number of commercial mortgages of varying terms, values, and property types—such as multi-family dwellings and commercial real estate.
Treasury Bonds
Treasury bonds (T-bonds) aregovernment debt securitiesissued by the U.S. federal government with maturitiesgreater than 20 years. T-bonds earn periodic interest until maturity. At this point, the owner is also paid an amount equal to the principal.
Municipal Bonds
Municipal bonds are debt securities issued by state and local governments. Municipal bonds are used to fund public works, such as parks, libraries, bridges and roads, and other infrastructure.
FAQs
A long-dated asset is a type of income-generating assets—such as residential mortgages and 30-year bonds—where the revenue streams occur until that asset's maturity date (which is well into the future). Pension funds and insurance companies invest in long-dated assets to match their long-term obligations.
What is a long-dated asset? ›
Long-term assets (also called fixed or capital assets) are those a business can expect to use, replace and/or convert to cash beyond the normal operating cycle of at least 12 months. Often they are used for years. This distinguishes them from current assets, which companies typically expend within 12 months.
What is long-dated fixed income? ›
The short-dated fixed income portfolio consists of bonds with an average maturity of one year. The medium-dated portfolio consists of bonds with an average maturity of three years. The long-dated portfolio consists of bonds with an average maturity of six years.
What is an example of an asset-backed security? ›
Asset-backed securities (ABS) finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans. In one way or another, these asset types represent contractual obligations to pay.
What are examples of securitized products? ›
Tradeable securities that are backed by pools of underlying financial assets such as mortgages (residential and commercial), loans (bank, auto, home equity, student) and credit card debt; these pools make up a new security, which is then split and sold in tranches to investors (mainly institutions).
What are examples of long-term assets? ›
Also known as non-current assets, long-term assets can include fixed assets such as a company's property, plant, and equipment, but can also include other assets such as long term investments, patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software.
What does long an asset mean? ›
Having a “long” position in a security means that you own the security. Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. The opposite of a “long” position is a “short” position.
What does long duration asset mean? ›
Key Takeaways. A long-dated asset is a type of income-generating assets—such as residential mortgages and 30-year bonds—where the revenue streams occur until that asset's maturity date (which is well into the future). Pension funds and insurance companies invest in long-dated assets to match their long-term obligations ...
What is a long-dated fund? ›
Private equity funds typically have a 10-year life, with the option for several one-year extensions. In a new development, GPs have started introducing what are known as long-dated private equity funds, with terms of 15 years or more (some even have no fixed term).
How do fixed income assets work? ›
Fixed-Income securities provide investors with a stream of fixed periodic interest payments and the eventual return of principal at maturity. Bonds are the most common type of fixed-income security. Different bonds have different term lengths depending on how long the issuer wishes to borrow for.
Downsides of Asset-Backed Securities
It can be difficult to evaluate the credit risk of the underlying assets without conducting extensive research. For retail investors, it may not be possible to conduct such a level of due diligence, and therefore, they may be exposed to unforeseen risks.
Who buys asset-backed securities? ›
Asset-backed securities (ABSs) are pools of loans that are packaged together into an investable security, which can in turn be bought by investors—predominantly large institutions like hedge funds, insurance companies, and pension funds.
What are three major types of asset-backed securities? ›
ABS Collateral Examples
Some common examples of asset backed securities (ABS) include: Home Equity Loans. Auto Loans. Credit Card Receivables.
What type of assets can be securitized? ›
Securitization involves taking a group of illiquid, income-producing assets and turning them into a single product that can be invested in. Pretty much anything with a stable cash flow can be securitized and turned into an asset-backed security (ABS). Classic examples include auto, student, and home loans.
What are the most frequently securitized assets? ›
Commercial banks regularly originate and securitize auto loans, credit card receivables, trade receivables, mortgage loans, and more recently small business loans.
What is an example of a long-lived asset? ›
Examples of long-lived tangible assets, typically referred to as and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles; examples of long-lived (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets ...
What are the assets used for a long period of time? ›
Long-Term Asset Examples
Land and buildings are long-term assets. Companies typically use key organizational buildings for many years. The land on which the building sits does not depreciate, but the value of a building will reflect its depreciating value on the balance sheet over time.
What is the difference between a current asset and a long term asset? ›
Current assets are short-term assets that are typically used up in less than one year. Current assets are used in the day-to-day operations of a business to keep it running. Fixed assets are long-term, physical assets, such as property, plant, and equipment (PP&E). Fixed assets have a useful life of more than one year.
What is the difference between short-term asset and long term asset? ›
In terms of section 2(42A) which defines a 'short-term capital asset', ordinarily, a capital asset held for 36 months or less is called a 'short-term capital asset' and the capital asset held for more than 36 months is called 'long-term capital asset'.
