Asset-backed securities, Financial Management

Assignment Help:

Introduction

When financial assets or bonds are pooled together and offered to the investors for receiving the inflow of funds from these underlying assets, they are termed as asset-backed securities. These comprise mostly receivables such as credit card receivables, auto loans, car loans, housing loans, etc. These asset-backed securities do not include mortgage loans. These are more creditworthy than the bonds as the paying capacity of the underlying assets is better than the bonds. Usually financial institutions in the area of credit card, auto finance, home finance, consumer loan finance companies including banks issue asset-backed securities. Through securitization, these companies pool together these loans and offer them to the investors.

Asset-backed Securities (ABS) though relatively new to the market, have a good growth potential. Asset-backed securities were first issued in 1985. The ABS Market, from its initial position has grown manifold in recent years. It is observed that the total market of asset-backed securities increased from $1.2 billion to $185 billion between 1985 and 1997. Some of the benefits of asset-backed securities are:

  1. Better Yield: Asset-backed securities provide better yield than bonds or mortgage-backed securities of similar quality and maturity.

  2. Better Credit Quality: Because of certainty of payments and lesser probability of default, asset-backed securities have a better credit quality. Moreover, the presence of collateral as guarantee for payment increases their creditworthiness.

  3. Diversity and Internal Diversification: Existence of various sources of underlying assets such as credit cards, auto loans, housing loans, etc., represent diversification of the asset-backed securities. The investors also have the opportunity to diversify investments as they have an additional avenue to invest their funds apart from treasury bills, bonds, etc.

  4. Predictability of Cash Flow: The cash flow from asset-backed securities can be predicted with certainty, as the pool of underlying assets is known. Moreover, there is certainty with respect to time period when the cash flow will take place. But recently, a few modified asset-backed securities are also being introduced wherein uncertainty about payment exists but these uncertainties are paid in the form of higher yield.

  5. Reduced Event Risk: When a bond or a share is issued to investors, they face the risk of downgraded credit rating of their investment due to several unforeseen and unpredictable events, which are out of the control of the investors. These may be mergers, acquisitions, and restructuring of the company, usually undertaken with an objective to improve the efficiency of the company and shareholders' values. However, asset-backed securities are protected from such risks as these are not issued by any company and are immune to the above mentioned changes.

Retail automobile loans, credit card receivables and home equity loans are the three most common types of asset-backed securities. These three are popularly referred to as CARs (Certificates for Automobile Receivables), CARDs (Certificates for Amortizing Revolving Debts) and HELS (Home Equity Loan Securities) respectively.


Related Discussions:- Asset-backed securities

Nature of current liabilities, Current Liabilities: A liability is an ...

Current Liabilities: A liability is an obligation to convey assets or do services at some future date. For purposes of balance sheet analysis, it is important to create a dist

Inventory is sometimes thought of as a necessary evil, Inventory is sometim...

Inventory is sometimes thought of as a necessary evil.  Explain. Inventory ties up funds and these funds aren't earning an unambiguous return.  Some inventory is habitually nec

Explain the costs and benefits of being a remote island, Problem: 1.1 C...

Problem: 1.1 Clearly explain the costs and benefits of being a small and remote island or a ministate economy. 1.2 Over the years, the role of government has been defined al

investment, what are the stages involved in investment decision makin

what are the stages involved in investment decision making

Analysis of financial plans, Part 1: Contingency plan Create contingency pl...

Part 1: Contingency plan Create contingency plans for the following scenarios: > One of your highly qualified consultants has given three months notice and is planning to move to a

Describe the characteristics of money markets, Question: (a) Consider t...

Question: (a) Consider that rate of interest is 10% and you are offered either a discount bond paying you $5,000 in 5 years or a fixed-payment loan paying you $750 per year for

Case study - danish mortgage bonds, (a) The subsequent is a discussion base...

(a) The subsequent is a discussion based upon IFR Special Report in issue 1239 during the Year 1998. Danish mortgage bonds have extended been domestic investors' referred d

Types of government stocks, Types of Government Stocks Issue of Stock t...

Types of Government Stocks Issue of Stock through AuctionThe RBI, on behalf of the government, issues notification to auction government securities, stating the amount and time

What is abc analysis, Q. What is ABC Analysis? ABC Analysis: - ABC Anal...

Q. What is ABC Analysis? ABC Analysis: - ABC Analysis is a method of controlling different items of inventory. Generally a firm has to maintain several different items as inven

Demerits of net present value method, Q. Demerits of net present value meth...

Q. Demerits of net present value method? (i) Difficult to Understand as well as Implement:- This method is tricky to understand as well as implement in comparison to the paybac

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd