ABS and other fixed income Flashcards
What is an asset-backed security and what are a few types?
An asset-backed security is a security that is backed by a pool of loans or receivables. These include: auto loans, consumer loans, commercial assets (planes, receivables), credit cards, home equity loans, and manufactured housing loans.
What are SPVs?
SPVs are also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.
What are internal enhancements?
Internal enhancements come in the form of reserve funds over collateralization and senior/subordinated structures.
What are CDOs?
An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds.
Why would someone issue an ABS?
The primary motive for issuing asset-backed securities is to take an asset, such as a receivable, a loan or some other form of illiquid asset, and move it off the balance sheet. This helps the parent to clean up its balance sheet and monetize those receivables rather than waiting for the payments to come in. It can also help protect those assets in case the parent defaults. This is possible because the SPV that was created is a separate entity.
What is bullet maturity?
Most corporate and government bonds use this structure, which requires the borrower to pay the investor one lump sum of the principle on the stated maturity date
What is the amortizing maturity structure?
Asset-Backed Securities (ABSs) along with Mortgage Backed Securities (MBSs) have structures that pay the principal back at certain intervals during the bond’s life. For example, a mortgage payment includes part principle and part interest. They are called amortizing securities because the principle amount shrinks as the security matures, so that the last payment made to the investors closes out the issuer’s responsibility concerning this bond.
What is duration?
Duration is an estimated measure of the price sensitivity of a bond to a change in interest rates. It can be stated as a percentage or in dollar amounts. It can be helpful to “shock” or analyze what will happen to a bond when market rates increase or decrease.
What is convexity?
Convexity helps to approximate the change in price that is not explained by duration. If you go back to the third property of a bond’s price volatility you will see that when there is a large change in rates, the duration measure can be way off because of the convex nature of the yield curve.
