2.1. Basic Features of a Bond

All bonds, whether they are “traditional” bonds or asset-backed securities, are characterized by the same basic features. Asset-backed securities (ABS) are created from a process called securitization, which involves moving assets from the owner of the assets into a special legal entity. This special legal entity then uses the securitized assets as guarantees to back (secure) a bond issue, leading to the creation of ABS. Assets that are typically used to create ABS include residential and commercial mortgage loans (mortgages), automobile (auto) loans, student loans, bank loans, and credit card debt, among others. Many elements discussed in this reading apply to both traditional bonds and ABS. Considerations specific to ABS are discussed in the introduction to asset-backed securities reading