• An asset-backed security is a type of bond or note that is based on a pool of assets, or collateralized by the cash flows from a specified pool of underlying assets. Assets are pooled to make otherwise minor and uneconomical investments worthwhile, while also reducing risk by diversifying the underlying assets. Securitization makes these assets available for investment to a broader set of investors. These asset pools can be made of any type of receivable, like credit card payments, auto loans, and mortgages. Typically, the securitized assets might be highly illiquid and private in nature.

• The underlying assets in an asset-backed security can be either an amortizing or a non-amortizing asset.  While in amortizing assets, the loan repayment is distributed over the life of the loan, non-amortizing assets do not have a particular fixed pattern of payment of interest and repayment of principal.

• Asset-backed securities can be classified as fixed and floating rate asset-backed securities. A floating rate asset-backed security is one whose underlying pool consists of loans or receivables carrying a floating rate. In fixed rate
  asset-backed securities, the underlying pool consists of fixed-rate loans whereas in a floating rate loan, the security is divided into one or more floating rate tranches.

• Credit enhancement encompasses a variety of provisions that may be used to reduce the credit risk of an obligation. It refers to one or more initiatives the originator in a securitization structure has to enhance the security, credit or the rating of the securitized instrument, i.e., by providing a cash collateral, profit retention, third party guarantee, etc.

• An asset-backed security can either have a pass-through or a pay-through structure. In a pass-through structure, each certificate holder will be allotted a proportion of the cash flow from the underlying pool of loans or receivables on a pro rata basis. In a pay-through structure, while a senior tranche can be split into different tranches, a subordinated tranche cannot be done so.

Posted Date: 9/8/2012 9:14:42 AM | Location : United States

Ask an Expert

Related Discussions:- Brief introduction of asset backed security, Assignment Help, Ask Question on Brief introduction of asset backed security, Get Answer, Expert's Help, Brief introduction of asset backed security Discussions

Write discussion on Brief introduction of asset backed security
Your posts are moderated

Write your message here..

Related Questions

Explain the book building guidelines, Question 1 Describe the functions... Question 1 Describe the functions of merchant banking and functions of financial intermediaries Question 2 What do you understand by book building and Green shoe option

Agency policy theorem, How might management try to solve the problems foun... How might management try to solve the problems found in agency theorem

Define merger activity in the past decade affected assets, How has the merg... How has the merger activity in the past decade affected the concentration of assets in the banking industry? A: Over the last decade, some commercial banks declined by twenty-o

Can you explain dispersion method, Q. Can you explain Dispersion method? ... Q. Can you explain Dispersion method? Dispersion method help to assert risk in receiving a return on investment. The greater the potential dispersion, the greater the risk. One

Financial Analysis Management, I need this in the next 24 hours urgently. I... I need this in the next 24 hours urgently. If you can accept this, you must be meeting the deadline with strictly no delays or full payment refund is needed

Types of rating - shadow rating, The issuer will not have to disclose... The issuer will not have to disclose the rating to the public. The firm can, either independently or with the help of its investment banker, assess its shadow

Computation of overall cost of capital, Q. Computation of overall Cost of C... Q. Computation of overall Cost of Capital? Computation of Value of the Firm (V) & Overall Cost of Capital when debt is lowered to Rs, 1, 00,000 When the debt is lowered to R

Estimate the most systematic risk, Yang Su is considering the following inf... Yang Su is considering the following information on two stocks:                                                                              Rate of Return State of Economy

Explain how a country can run an overall balance of payments, Explain how a... Explain how a country can run an overall balance of payments deficit or surplus. Answer:  A country can run a whole BOP (balance of payments) deficit or surplus by engaging in th

Define modern approach of financial management, Define Modern Approach of f... Define Modern Approach of financial management Modern approach views the term financial management in a broad sense and provides a conceptual and analytical framework for fina