Series 7 practice questionmediumABS — Asset-Backed Securities
Which of the following would most likely serve as collateral for an asset-backed security (ABS)?
- AAuto loans, credit card receivables, or student loans✓ Correct answer
- BCorporate stock certificates
- CUS Treasury bonds
- DMunicipal GO bonds
Explanation
Why A — Auto loans, credit card receivables, or student loans
Asset-backed securities are collateralized by pools of assets other than residential mortgages, including auto loans, credit card receivables, student loans, equipment leases, and home equity loans. The cash flows from these underlying assets (principal and interest payments from borrowers) are passed through to ABS investors. ABS provide issuers with a way to remove assets from their balance sheet and convert them into liquid securities.
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