Module 18 · Fixed Income

Asset-Backed Securities (ABS)

EN: ABS backed by non-mortgage receivables — auto loans, credit cards, student loans, CDOs.
VN: ABS bảo đảm bằng các loại nợ khác mortgage.

1. ABS Asset Classes Concept

About: Auto loans (amortizing), credit cards (revolving with lockout), student loans (often gov-guaranteed), CDOs (debt-of-debt), CLOs (leveraged loans).Tóm tắt: Auto, credit card (revolving), student, CDO (debt-of-debt), CLO (leveraged loans).

Auto loans Amortizing principal; medium prepayment risk.
Credit-card Non-amortizing (revolving) — uses lockout period before paydown.
Student loans Often govt-guaranteed.
CDO Collateralized debt obligation — backed by other debt instruments (bonds, ABS).
CLO Collateralized loan obligation — backed by leveraged loans.

2. Prepayment Risk in ABS Concept

About: Contraction (rates fall → fast prepay → CFs return early). Extension (rates rise → slow prepay → stretch). Both bad for fixed-income manager. CPR/SMM measure speed.Tóm tắt: Contraction (rate giảm) vs extension (rate tăng). Cả hai bất lợi. CPR/SMM đo tốc độ.

Contraction Rates fall → faster prepayment → cash flows return earlier.
Extension Rates rise → slower prepayment → cash flows stretch out.
CPR Conditional prepayment rate — annualized prepayment %.
SMM Single monthly mortality = 1 − (1 − CPR)^(1/12).

3. Lockout in Credit-Card ABS Concept

About: Lockout period (1-3y typical) — interest paid out but principal reinvested in new receivables. After lockout, principal pays down.Tóm tắt: Lockout (1-3 năm) — trả lãi nhưng principal tái đầu tư. Sau lockout: trả gốc.

During the lockout period (1–3 years typical), interest is paid to investors but principal collections are reinvested in new receivables. After lockout, principal is paid down.

Practice problem Practice

Practice problem

Annual CPR = 12%. Compute the single monthly mortality (SMM).

Show solution

SMM = 1 − (1 − CPR)\(^{1/12}\)

= 1 − (0.88)\(^{1/12}\)

= 1 − 0.9894

SMM ≈ 1.06% per month