the investors buying the ABS

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Business Finance

Description

You are a finance employee at a financial institution, specializing in originating auto loans in a country where auto loans have only been available for 2 years. Your group has just been informed that a close competitor has securitized $150 million in auto loans through an investment bank.

  • Your boss wants to understand why the competitor did this. Explain.
  • He also wants to understand the potential benefits for the following:
    • the issuer
    • the investors buying the ABS
    • the individual borrowers seeking auto loans
  • He also wants to know the likely impact to the auto loan market in this country if a large, liquid ABS market emerges over the next few years.

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Explanation & Answer

Attached.

Student’s Name
Professor’s Name
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Date
Securitization of auto loans
Securitization of auto loans or any asset-backed security is important for a business in several
instances that are based on risk diversification. Auto loans, at their basic, are consumer loans that have
an interest, and amortization schedule, but they differ in the sense that they are collateralized against
an asset, which is the car. This means that they are subject to risk and a business enterprise must be
careful in their handling. This care is manifested in the form of securitization of these loans. It involves
originating numerous loans that are secured against the claims to the as...


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