Introduction to Asset-Backed Securities

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. Let’s get started!

How Securitisation Works

Ever wondered how asset-backed securities (ABS) are structured and protected in case of a bankruptcy? Well, wonder no more! This lesson takes you on a journey through the landscape of ABS and then zips you over to the realm of covered bonds. We’ll compare and contrast the two, and even dip our toes into the nitty-gritty of different types of covered bonds.

► Embark on this fantastic financial journey here.

Residential Mortgage Loans

Strap in for a crash course in residential mortgage loans! This lesson breaks down the basics, from what a residential mortgage loan is, to the key characteristics and types of mortgage loans, including prime and subprime. Plus, you’ll learn about lender rights in foreclosure and get to grips with the nitty-gritty of loan-to-value ratios. It’s a mortgage marvel!

► Jump into the world of residential mortgage loans here.

Residential Mortgage-Backed Securities

Get ready to navigate the riveting realm of Residential Mortgage-Backed Securities (RMBS)! This lesson breaks down the different sectors of RMBS, the contrasts between agency and non-agency RMBS, and the key role of prepayment risk. Plus, you’ll dive deep into how tranching and credit enhancements can manage risks and make non-agency RMBS attractive to investors. It’s all about mastering the mortgage market!

► Take a deep dive into Residential Mortgage-Backed Securities here.

Commercial Mortgage-Backed Securities

Embark on a journey into the bustling world of Commercial Mortgage-Backed Securities (CMBS)! This lesson unearths the key distinctions between CMBS and residential MBS, with a special focus on credit risk analysis, and the vital role of Debt-Service-Coverage and Loan-to-Value ratios. You’ll also get to grips with CMBS-specific features like call protection, balloon maturity provisions, and subordinated tranches. Next stop? Non-mortgage-backed securities!

► Dive deeper into Commercial Mortgage-Backed Securities 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.

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.