There are two groups of financial instruments, Close End and Open End, the Mortgage Loans, Bonds, Promissory Notes and others are in the first group, the Credit Cards, Credit Line in Checking Account and others are in the second one.
The Open Ends in general are simpler, more flexible and they have lower operational cost than the Close Ends. In consequence, the Open Ends have been making obsolete the Close Ends when both have competed in the same market segment. A typical case is how the Credit Cards made obsolete to Bill of Exchange in almost all markets.
Why have the Mortgage Loans and Bonds not been replaced yet by Open End financial instruments? The main reason is that the Open Ends mix many operations in a same account, therefore all operations need to be treated with a same interest rate.
Considering the interest rate changes continuously, all Open End financial instruments allow changing the interest rate of the account. Some instruments change the interest rate daily, others monthly, and others quarterly; no more, because the instrument can be affected if the market interest rate is very different of the nominal interest rate of the financial instrument.
In consequence, all Open End financial instruments have been designed for the short-term markets. The reason why the Close End financial instruments have could follow reigning in the medium-term and the long-term market. Nevertheless, this reign will be over soon with the introduction of the Open End financial instrument Sciac Card in the long-term and medium-term.
How can the Sciac Card solve the interest rate problem of the Open End for those markets? The answer is a mathematical finance solution, which has two parts, the amortization rate method and the nominal value equivalent method.
The amortization rate method consists in calculating the periodic amortization of an ordinary installment as a fixed percentage of the latest balance. The nominal value equivalent method consists in integrating into the account a nominal value of the savings and the credit, equivalent to the effective value of the transaction.
This payment and transaction conditions allow the integration of savings and credits belonging to the same payment account plan into a single account, for any amount, carried out at different periods in time, with different fixed or adjustable effective interest rates and different to the fixed or adjustable nominal interest rate defined in the payment account plan, without losing the payment and transaction conditions of each integrated savings and credit.
All mathematical finance formulas of Sciac Card are extremely simple, very much simpler than Mortgage Loans and Bonds. Additionally, the Sciac Card does not need to be packaged as the collapsed Mortgage Backed Securities (MBS) and Credit Derivative Obligations (CDO). Therefore it can be classified as a plain vanilla product, like in The Financial Regulatory Reform is being required.
More information in www.sciac.com