Which statement describes ABSs?

Which statement describes ABSs?

• A. A type of currency-backed security.
• B. A type of government bond; always backed by tax revenues.
• C. A type of bond where unmarketable securities are bundled together and made marketable; illiquid assets include mortgages, credit card debt and accounts receivable; securitisation.
• D. A kind of equity security with securitised assets.

Answer: (C)

Asset-backed securities are bonds created by pooling together illiquid financial assets and issuing securities backed by the cash flows from that pool. The underlying assets are often illiquid loans or receivables such as mortgages, credit card debt, or accounts receivable. Through securitisation, these assets are placed in a special vehicle and securities are issued to investors in tranches with different risk and return profiles, sometimes with credit enhancements to improve senior-tranche credit quality. By converting a pool of illiquid assets into marketable securities, the originator gains liquidity while investors gain exposure to the cash flows from the assets. This description matches ABS: a bond created from securitising a pool of illiquid assets, including mortgages and other receivables, making them marketable. It’s not a currency-backed security, nor a government bond backed by tax revenues, nor an equity security with securitised assets.

Asset-backed securities are bonds created by pooling together illiquid financial assets and issuing securities backed by the cash flows from that pool. The underlying assets are often illiquid loans or receivables such as mortgages, credit card debt, or accounts receivable. Through securitisation, these assets are placed in a special vehicle and securities are issued to investors in tranches with different risk and return profiles, sometimes with credit enhancements to improve senior-tranche credit quality. By converting a pool of illiquid assets into marketable securities, the originator gains liquidity while investors gain exposure to the cash flows from the assets. This description matches ABS: a bond created from securitising a pool of illiquid assets, including mortgages and other receivables, making them marketable. It’s not a currency-backed security, nor a government bond backed by tax revenues, nor an equity security with securitised assets.