Asset-Backed Bonds

According to www.riskglossary.com, an asset based security is a securitized interest in a pool of assets.

These assets are non mortgage assets. There is prepayment in risk in Asset backed bonds too, but lower than in Mortgage backed bonds, because people are more likely to refinance home than other assets.

Asset Backed Bond appeals to both issuer and investor. It allows issuers to get assets off their balance sheet. For investor, it is less subject to credit surprises due to the diversity of the underlying assets.

To create Asset backed bonds, a company will sell its assets to a special purpose vehicle. It will then sell the securities to investors.

There are several choices of Asset backed bonds investors can choose based on underlying assets.

Some legal safeguards can be put in place to protect investors from company`s bankruptcy. These safeguards allow company to remove assets from its balance sheet. But it generally continues to service these assets.

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