Page 228 - A Canuck's Guide to Financial Literacy 2020

228

Benefits to the Institutions

▪ New Capital – Institutions are able to raise capital at rates that would be considered
more affordable than if they were to go through a commercial bank. Rates may be
fixed or variable, aligned to the prime rate.
▪ Clean Balance Sheet – By pooling loans, institutions are able to clean their balance
sheet by freeing up cash sitting idle and remove the risk of debt.
▪ Enhanced Liquidity – By removing the risk of debt and turning it liquid, the institutions
are still able to earn income by lending the capital back out to new borrowers or
interested investors.

Benefits to the Investor

▪ Choice for the Investor – Asset backed securities allow the investor to choose
exposure to specific sectors in the economy. In addition to home equity loan
payments, an investor can choose to purchase ABS that are related to proceeds from
car loans, equipment leases, student loans, etc.
▪ No Intermediary Risk – An investor would not have to worry about the risk profile that
the institution has bundled up together in an asset backed security. Even if the
institution were to go into default, the income stream would be unaffected thus not
exposing you to the risk profile of an intermediary.
▪ Higher Yields – Asset backed securities tend to offer higher yields than comparable T-
bills or yields that are similar to corporate bonds and mortgage backed securities.

The securitization process involves bundling illiquid assets for the purpose of selling them in
the secondary markets.