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FRM Part II · FRM Exam Part II · An Introduction to Securitisation

A bank pools 5,000 auto loans, transfers them to a special purpose vehicle, and the vehicle issues notes whose payments depend on the loan cash flows. Which label best describes the notes?

The notes are asset-backed securities, because they are issued by a special purpose vehicle and paid from the cash flows of a pool of auto loans. Covered bonds keep recourse to the issuing bank, and CLOs hold corporate loans.

  1. AAsset-backed securitiesCorrect
  2. BCollateralised loan obligation equity only
  3. CCovered bonds with dual recourse to the bank
  4. DCredit-linked notes referencing a single issuer

Explanation

Notes backed by a pool of consumer receivables such as auto loans and issued by an SPV are asset-backed securities. Covered bonds stay on the issuer's balance sheet with recourse to it. A CLO is backed by corporate loans, and a credit-linked note references a single entity's credit.

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