Asset-Backed Security (ABS) Instrument and Market Features

Prior Learning Modules have shown the funding technique of securitization can be backed by diverse types of assets, including loans and receivables as well as residential or commercial mortgages. A unifying principle in all asset-backed security (ABS) structures is that their underlying cash flows can be reconfigured into various tranches, each with its particular payment pattern to investors and associated risks. The advantage of this targeted partitioning includes a reduction in the variability of cash flows and the reallocation of risks, such as default and early repayment across specific tranches, with associated returns. Overall, ABS securitization provides risk transfer, flexibility to issuers and investors, and efficiency of capital allocation.