In ABSs, risks (such as a range of receivables) are grouped together and transferred
to a special purpose vehicle (SPV). The SPV finances this transaction by issuing securities
backed by a pool of assets or a portfolio. If the collateral is a mortgage, this
kind of instrument is called a mortgage-backed security (MBS).
The individual components of the portfolio would be unattractive or even unobtainable in this form for
However, the composition of the portfolio makes it possible to
combine together and sell a range of assets and risks. By grouping together different
types of credit risk, different risk profiles can be created.
Even if a pool or portfolio is created, lack of diversification can lead to a concentration
Credit bonds securitise the risks and transfer them to third parties as credit-linked
notes, collateralised debt obligations and asset-backed securities. As a result, the
buyer takes on the risk associated with a loan portfolio.
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