Introduction to Asset-Backed Securities for the CFA Level 1 Exam

Prepare to dive into the fascinating world of asset-backed securities! This article will walk you through the essentials of this fixed-income topic, all the way from the basics of securitisation to the complexities of collateralised debt obligations.

Covered Bonds

This lesson takes a deep dive into the world of covered bonds, popular financial products in some European and Asian countries. You’ll learn how these bonds, similar to ABS but with underlying assets remaining on the originating firm’s balance sheet, provide extra protection to bondholders. Discover the different types of covered bonds, including hard-bullet, soft-bullet, and conditional pass-through, and their respective provisions in case of issuer default.

► Dive into the world of covered bonds here.

Credit Enhancements

Peel back the layers of credit enhancements in asset-backed securities to understand how they protect investors from potential losses. This lesson covers both internal mechanisms like subordination and overcollateralization, and external safeguards such as surety bonds, enhancing the security’s attractiveness and credit rating.

► Dive deeper into credit enhancements here.

Non-Mortgage Asset-Backed Securities

In this thrilling exploration of non-mortgage asset-backed securities (ABS), you’ll get a handle on the key differences between amortising and non-amortising loans. You’ll be taken on a ride through the workings of auto loan-backed securities, complete with their unique credit enhancements, before stepping into the intriguing world of credit card receivable-backed securities and their lockout periods. Next up, the equally exciting world of collateral debt obligations awaits!

► Accelerate your understanding of non-mortgage asset-backed securities here.

Collateralised Debt Obligations

Venture into the final frontier of asset-backed securities with collateral debt obligations (CDOs). This lesson explains how pools of diverse debt obligations create these structured securities, from structured finance CDOs to synthetic CDOs. You’ll also learn about the tiered structure of CDOs, including senior, mezzanine, and subordinated bonds, and how returns are generated for the different tranches.

► Unlock the mysteries of collateral debt obligations here.