What is Asset-Backed Bonds?

Asset-backed bonds are not a bond variety but are included here for the sake of comprehensiveness. Any of the bonds already mentioned or to be mentioned can be asset-backed, i.e. backed by certain assets. For example, central government securities in most countries are backed by the revenue and assets of the country.

Other examples of asset-backed bonds are the bonds issues of SPVs. As noted in a previous section, SPVs are the product of securitizations undertaken mainly by banks and companies themselves.

In the case of a mortgage securitsation the mortgages of individuals are pooled in a SPV and these are financed by the issue of two tiers of mortgage-backed securities (MBS): prime rated (AAA) bonds to the extent of about 90% and subordinated bonds for the balance of 10% (actually there are three tiers of MBS – see next section). All the bonds are backed by specific mortgages. This means that if the SPV fails, the holder of the bonds has a call on the underlying mortgage bonds.

A variation of the securitized mortgage-backed bond is the non-securitized mortgage-backed bond. An example is a power plant utility that issues bonds to finance the building of a plant. The plant is mortgaged (which means that it is pledged as collateral security for the bond).