ABS stands for Asset-Backed Security. It is a type of security that is backed by a pool of assets, such as loans, receivables, or leases. ABSs are often issued by special purpose vehicles (SPVs), which are created to hold the assets and issue the securities. ABSs are a popular form of financing for a variety of reasons.
First, they allow issuers to access capital at a lower cost than they would be able to obtain through traditional bank loans. Second, they can be used to finance a wide range of assets, including those that are not easily financed through traditional means.
Third, ABSs can be tailored to meet the specific needs of investors. There are a number of different types of ABSs, each with its own unique features. Some of the most common types of ABSs include:
Mortgage-backed securities (MBSs): MBSs are backed by a pool of mortgages. They are the most common type of ABS.
Asset-backed commercial paper (ABCP): ABCP is backed by a pool of short-term receivables. It is a popular form of short-term financing.
Collateralised debt obligations (CDOs): CDOs are backed by a pool of debt securities. They are a more complex type of ABS that can be used to finance a variety of assets. ABSs are a complex financial instrument that carries a number of risks.
These risks include:
Credit risk: The value of ABSs is linked to the creditworthiness of the assets that back the securities. If the assets default, the value of the ABSs will decline.
Liquidity risk: ABSs can be difficult to sell if investors need cash quickly.
Interest rate risk: The value of ABSs is sensitive to changes in interest rates. If interest rates rise, the value of ABSs will decline. Investors should carefully consider the risks of ABSs before investing in this type of security.