• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High quality tutorials for finance, risk, data science, fintech, accounting and more

  • Home
  • Finance Exams
    • CFA Exam
    • CAIA Exam
    • ERP Exam
    • FRM Exam
    • PRM Exam
  • Tutorials
  • Careers
  • Calculators
  • Products

Analyzing Credit of Asset Backed Securities

CFA Exam, CFA Exam Level 2, Structured Finance

This lesson is part 4 of 17 in the course Fixed Income Part 1

An asset-backed security is a security whose price and income is derived from a specific pool of underlying assets (or collateral).

These securities are debt obligations that represent claims to the payments or cash flows from pools of different asset classes (loans). Some examples of these assets are credit card loans, auto loans, bank loans, etc. If the underlying collateral is mortgages, then the securities are called mortgage-backed securities. These loans from banks, mortgage companies, and other originators are assembled into pools. The entity then issues securities based on these pools that represent claims on the principal and interest payments/cash flows made by borrowers on the loans in the pool.

Common considerations for analyzing asset-backed securities include:

  • Credit quality of the underlying collateral. This is the most important factor, as the quality of the collateral will define the success of an ABS deal, the timely payments of cash flows, etc. We also need to look for the concentration risk, that is, the scenario where an asset pool holds loans from only a small group of borrowers, or is concentrated in a particular demographic.
  • Servicer quality: Given the servicer’s key role in administering and managing the loan pool, it is imperative to understand the servicer’s ability to effectively perform its functions.
  • Payment structure and cash flow capability of the asset pool. The analyst must carefully analyze the payment structure and the cash flows of the asset pool. The availability of liquidity / credit enhancement / insurance are also important. In case of a fully supported ABS transaction, the repayment is supported by a financial guarantee, such as a surety, letter of credit, third-party guarantee, or liquidity facility. In case of a partially-supported ABS deal, the repayments are supported by cash flows from the pool, and liquidity and credit enhancement.
  • Legal structure of the asset backed security.

Series Navigation‹ High Yield Corporate Debt (aka Junk bonds)Analyzing Credit of Municipal Bonds ›
Join Our Facebook Group - Finance, Risk and Data Science

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • CFA Level 2: Fixed Income Part 1 – Introduction
  • Principles of Credit Analysis
  • High Yield Corporate Debt (aka Junk bonds)
  • Analyzing Credit of Asset Backed Securities
  • Analyzing Credit of Municipal Bonds
  • Sovereign Debt
  • Three Shapes of the Yield Curve
  • Parallel and Non-parallel Shifts in Yield Curve
  • Factors Driving Treasury Investment Returns and Bond Price Risk
  • Yield Curve Construction with Treasuries
  • LIBOR Swap Rate Curve
  • Theories of the Term Structure of Interest Rates
  • Key Rate Duration
  • How to Calculate Interest Rate Volatility?
  • Benchmark Yield Spreads
  • Valuing an Option Embedded Bond using Binomial Interest Rate Tree
  • How to Price Convertible Bonds?

Finance Exam Products

  • CFA Level I Mock Exam
  • CFA Level I Practice Questions
  • CFA Level I Authority
  • PRM Exam I Practice Questions
View All Products

Latest Tutorials

    • Machine Learning in Finance Using Python
    • Portfolio Analysis in R
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Prime Brokerage
    • Financial Reporting Standards
    • Fraud
Facebook Group

Footer

Recent Posts

  • Social media reporting – it is not as difficult as you think
  • Model Selection in Machine Learning
  • Evaluate Model Performance – Loss Function
  • Train-Test Datasets in Machine Learning
  • Feature Selection in Machine Learning

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

Copyright © 2019 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us