In ABSs, which assets are commonly securitised?

In ABSs, which assets are commonly securitised?

• A. Corporate bonds and equities
• B. Government bonds and blue-chip stocks
• C. Physical commodities futures
• D. Mortgages, credit card debt and accounts receivable

Answer: (D)

Asset-backed securities are created by pooling cash-flow generating assets and using those cash streams to back securities issued to investors. The materials used in this way are typically assets that produce regular, predictable payments and can be divided into many small pieces so investors can receive a share of the cash flows. Mortgages provide steady principal and interest payments over time, making them a classic securitizable pool. Credit card receivables offer ongoing payments as cardholders repay balances, another reliable source of cash flows. Accounts receivable represent money owed to a company by its customers and can be bundled and sold to investors who receive the payments as invoices are paid. These types of assets are well-suited to securitization because their cash flows are relatively stable and can be pooled and tranching can tailor risk and return for different investors. In contrast, corporate bonds and equities are already traded securities with their own market prices and do not constitute a pool of cash flows to securitize in the same way. Government bonds and blue-chip stocks are likewise traded directly and not typically securitized in the standard ABS sense. Physical commodities futures are derivatives based on underlying commodities rather than cash-flow-generating receivables, so they aren’t the typical assets securitized in ordinary ABS structures.

Asset-backed securities are created by pooling cash-flow generating assets and using those cash streams to back securities issued to investors. The materials used in this way are typically assets that produce regular, predictable payments and can be divided into many small pieces so investors can receive a share of the cash flows.

Mortgages provide steady principal and interest payments over time, making them a classic securitizable pool. Credit card receivables offer ongoing payments as cardholders repay balances, another reliable source of cash flows. Accounts receivable represent money owed to a company by its customers and can be bundled and sold to investors who receive the payments as invoices are paid. These types of assets are well-suited to securitization because their cash flows are relatively stable and can be pooled and tranching can tailor risk and return for different investors.

In contrast, corporate bonds and equities are already traded securities with their own market prices and do not constitute a pool of cash flows to securitize in the same way. Government bonds and blue-chip stocks are likewise traded directly and not typically securitized in the standard ABS sense. Physical commodities futures are derivatives based on underlying commodities rather than cash-flow-generating receivables, so they aren’t the typical assets securitized in ordinary ABS structures.