Page 85 - FINAL CFA SLIDES DECEMBER 2018 DAY 14
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LOS 53.h: Describe types and characteristics of
non-mortgage asset-backed securities, Session Unit 15:
including the cash flows and risks of each 53. Introduction To Asset-Backed Securities
type., p.89
Auto Loan ABS: these have maturities from 36 to 72 months. Issuers include the financial subsidiaries of auto
manufacturers, commercial banks, credit unions, finance companies, and other small financial institutions.
The cash flow components include interest payments, scheduled principal payments, and prepayments. Auto
loans prepay if the cars are sold, traded in, or repossessed. Prepayments also occur if the car is stolen or
wrecked and the loan is paid off from insurance proceeds. Finally, the borrower may simply use excess cash
to reduce or pay off the loan balance. All have some sort of credit enhancement to make them attractive to
institutional investors.
tanties
Credit Card ABS: the cash flow to a pool of credit card receivables includes finance charges, annual fees, and
principal repayments. Credit cards have periodic payment schedules, but because their balances are
revolving (i.e., non-amortizing), the principal amount is maintained for a period of time. Interest on credit
card ABS is paid periodically, but no principal is paid to the ABS holders during the lockout period, which may
last from 18 months to 10 years after the ABS are created.
If the underlying credit card holders make principal payments during the lockout period, these payments are
used to purchase additional credit card receivables, keeping the overall value of the receivables pool
relatively constant. Once the lockout period ends, principal payments are passed through to security holders.
Credit card ABS typically have an early (rapid) amortization provision that provides for earlier amortization of
principal when it is necessary to preserve the credit quality of the securities. Interest rates on credit card ABS
are sometimes fixed but often they are floating. Interest payments may be monthly or quarterly!
