Question

In: Finance

please explain how student loans are an asset-backed security

please explain how student loans are an asset-backed security

Solutions

Expert Solution

Asset backed Securities (ABS) are a product of financial engineering which are collateralized by a bunch of financial assets like loans, auto loan receivables, lease etc. Non-tradable but simple illiquid assets are converted into tradable but complex liquid securities. So, there is an overall reduction in liquidity risk.

In student loan asset backed securities, the pool of assets comprises of outstanding student loan receivables which imlies that outstanding student loans are pooled together and then securitized to form a trading security. The return of the investor in such securities is linked to repayment of such loans. Since, most of the student loans are backed by the government, these loans often do not involve a credit check. Due to this reason, student loan asset backed securities carry a significant amount of risk because in most cases, the banks do not assess the borrower’s ability to repay the loans. Another feature of student loans is that they are not collateralized, hence in the case of borrower failing to repay the loan, there is nothing to be foreclosed.


Related Solutions

Explain how negative convexity impacts the price of amortizing securities such as mortgage-backed or asset-backed bonds...
Explain how negative convexity impacts the price of amortizing securities such as mortgage-backed or asset-backed bonds relative to Treasuries when market yields change.
Explain what it is a mortgage backed security (MBS) and how it is functions. Discuss how...
Explain what it is a mortgage backed security (MBS) and how it is functions. Discuss how these securities caused 2008 USA financial crisis?
Explain how managing your student loans (or personal loans and debt if you don’t have student...
Explain how managing your student loans (or personal loans and debt if you don’t have student loans) can contribute to personal financial success and growth.
Suppose that the structure for an asset-backed security is as follows: Senior bond class: $200 million...
Suppose that the structure for an asset-backed security is as follows: Senior bond class: $200 million Subordinated bond class 1: $30 million Subordinated bond class 2: $20 million The subordinated bond class 2 is the first loss piece. If losses due to defaults over the life of the structure total $60 million, what is the amount of loss for the senior bond class? A. 0 B. $10 million C. $20 million
What is a mortgage-backed security, how it functions, and how it contributed to the financial crisis...
What is a mortgage-backed security, how it functions, and how it contributed to the financial crisis of 2007 & 2009. (1000 words)
a. What are the pros and cons of asset-backed securities such as mortgage-backed securities to the...
a. What are the pros and cons of asset-backed securities such as mortgage-backed securities to the retail or institutional investors? b. What are the roles played by various financial institution(s)? c. Mutual funds have been gaining popularity among investors. From the investors’ point of view, illustrate why it is usually a better choice to buy the mutual funds than to buy asset-backed securities.
write a short essay by using the following words securitization asset- backed security mezzanine tranche CDO...
write a short essay by using the following words securitization asset- backed security mezzanine tranche CDO subprime mortatge flight to quality rating and bubble
BRIEFLY explain the process by which a standard mortgage backed security is created and sold by...
BRIEFLY explain the process by which a standard mortgage backed security is created and sold by connecting in order the following groups: big Wall Street banks, homeowners, institutional investors, ratings agencies, and mortgage originators.Briefly explain the process by which a standard mortgage backed security is created and sold by connecting in order the following groups: big Wall Street banks, homeowners, institutional investors, ratings agencies, and mortgage originators.
what is the difference between a Mortgage Backed Security and a Collateralized Debt Obligation? Explain with...
what is the difference between a Mortgage Backed Security and a Collateralized Debt Obligation? Explain with reference to the source of the funds from which investors will be repaid.
what is the difference between asset backed and asset based and what is the consequences to...
what is the difference between asset backed and asset based and what is the consequences to the ownership if sukuk is default
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT