Fixed Income I
Reading 45. Introduction to Asset-Backed Securities
Learning Outcome Statements
h. describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type;
CFA Curriculum, 2020, Volume 5
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Subject 7. Non-Mortgage Asset-Backed Securities
Auto Loan Receivable-Backed Securities
- Underlying collaterals: amortizing auto loans and lease receivable
- Prepayment risk due to repossession, early payoff, insurance settlement from wreck, sale of vehicle, or refinancing (rare)
- Credit enhancement: senior/subordinated structure, reserve account, overcollateralization, excess interest on receivables
Credit Card Receivable-Backed Securities
- Collateral is non-amortizing loans
- Fixed or floating interest rates
- The lockout period is the amount of time that principal repayments are reinvested in new receivables rather than returned to security holders. During this period the cash flow paid out to security holders is based only on finance charges collected and fees. The principal amortizing period is from the end of the lockout period through the end.
- Early amortization is a type of credit enhancement. It is usually triggered when there is a sudden increase in delinquencies in the underlying loans or when excess spread, the issuer's net profit after deducting servicing fees, charge-offs and other costs, falls below an acceptable level.
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Formula for ABS:
ABS = SMM / (1 + SMM (months elapsed - 1))
SMM = ABS / (1 - ABS (months elapsed - 1))
ABS = monthly prepayment rate (% of the original loan amount)
SMM = monthly prepayment rate (% of the outstanding balance)
why Absolute prepayment speed is ABS..is it just an error?
No it's not an error. This abbreviation (which, confusingly, is the same as that used for asset-backed securities) is commonly applied to securities backed by auto loans, truck loans, RV loans and auto leases.