Brief introduction of asset backed security, Financial Management

Assignment Help:
  • 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.


Related Discussions:- Brief introduction of asset backed security

Sources of finance, Classification of finance and abrief description of eac...

Classification of finance and abrief description of each source of fund

Benefits of niche and specialisation markets, a) Ltd. stands for ‘private l...

a) Ltd. stands for ‘private limited company', i.e. a business with limited liability with shares being issued only to friends and family with the approval of the board of directors

Calculate the total present value of the tax shield, Nortel is considering ...

Nortel is considering the purchase of a new  call routing system.  The system will cost $50M to purchase, an additional $7M to install, and will last for 30 years.  The CCA rate as

What is a fair price for a share, Sega Inc. expects earnings/dividends to g...

Sega Inc. expects earnings/dividends to grow at an annual rate of 30 percent for the next 4 years. After that they feel that the market will get saturated and the growth rate will

Time value of money, In order to provide for R10 million to build a new war...

In order to provide for R10 million to build a new warehouse in 5 years time, a company plans to make equal payments at the end of each six months into a fund which earns 9% per ye

Principle of opportunity cost, Suppose you have recently been contracted as...

Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their pr

Does high operating leverage always mean high business risk, Does high oper...

Does high operating leverage always mean high business risk?  Explain. High operating leverage doesn't always mean high business risk.  If the company's sales are quite steady

The profitability and liquidity of the firm, Explain how the working capita...

Explain how the working capital management policies affect the profitability and liquidity of the firm?

Currency, You have the following limited information upon which to base you...

You have the following limited information upon which to base your decision as to which is the better of two alternative funding arrangements: ? Alternative 1 is to arrange funding

Financial information, A)  What are the statements of financial information...

A)  What are the statements of financial information? Talk about two items from each. B)   Describe statement of changes in financial positions, with an example.

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