what is asset-backed securities?
Asset-backed securities (ABS) are financial instruments that are created by pooling together and securitizing various types of assets, such as mortgages, credit card debt, auto loans, and other types of consumer and commercial loans. These assets are used as collateral for the securities, which are then sold to investors. The cash flows generated by the underlying assets are used to make interest and principal payments to investors.
ABS can be divided into two main categories:
Residential mortgage-backed securities (RMBS): These are securities that are backed by pools of residential mortgages. RMBS are among the most common types of ABS.
Commercial mortgage-backed securities (CMBS): These are securities that are backed by pools of commercial mortgages.
ABS can be issued by a variety of entities, including banks, securities firms, and government-sponsored entities. They are typically rated by credit rating agencies, and the ratings reflect the credit quality of the underlying assets and the structure of the securities.
Asset-backed securities are generally considered to be a lower-risk investment than other types of fixed-income securities, but they also typically offer lower returns. They can provide investors with a relatively stable source of income and can also help to diversify a portfolio.
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