CFA Level I · CFA Level I Exam · Fixed-Income Securitization
A covered bond differs from a typical asset-backed security issued through a securitization most likely because the covered bond:
A covered bond is backed by a cover pool that stays on the issuer's balance sheet, and the issuer remains obligated to pay. In an ABS the assets are sold to a special purpose entity, which is what the other two options describe.
- Ais backed by a cover pool that stays on the issuer's balance sheetCorrect
- Btransfers the pool of assets to a special purpose entity
- Cpasses borrower payments directly to investors
Explanation
In a covered bond the assets remain on the issuer's balance sheet, and the issuer must pay bondholders from its own resources. Investors also have dual recourse. An ABS moves assets to a special purpose entity and passes cash flows from the pool, so the other options describe securitization.
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