Asset backed securities(ABS) represent one the most rapidly growing segment of the fixed income markets. While mortgage backed securities(MBS) have been widely issued and traded over the counter, ABS market has shown relatively slow development until 1990. Since then, ABS market has experienced substantial growth in those regions such as North America, Europe, and Japan. ABS is important financial securities in that they provide some significant advantages to investors as well as those issuers, namely companies and financial institutions. Most importantly, ABS represent an alternative source of funding for corporations that is both off-balance sheet and frequently cheaper (for the loan originators) than unsecuritized on-balance sheet financing.
Coupled with financial distress which has swept over the asian developing countries, companies and financial institutions have been seeking efficient ways to streamline their funding sources. And ABS has been chosen as one of the most reliable alternatives. Whether to issue or to invest into an ABS, one needs to be aware of the features of ABS such as structure, credit enhancement, prepayment, and valuation technique in order for him to get a better deal to issue or to reduce the risk embedded in ABS investment.
In this paper, MBS plays an introductory role to provide the base for understanding asset securitization. Then, the structural feature of ABS, credit enhancement, prepayment, and option-adjusted spread(OAS) as a valuation tool are dealt sequentially. As an example for ABS, collateralized bond obligatioins and collateralized loan obligations are dealt in depth.
With the help of structured financing or asset securitization, financial institutions in domestic market can find useful ways to enhance asset liquidity, to hike up their BIS ratio, to build up loan capacity, to diversify risk over to investors who are willing to bear the risk, and creating new revenue sources.
