medium · Asset-Backed Securities collateral
Why does a securitized pool of 10,000 subprime auto loans often have a lower cost of funds than an unsecured bond from the same originator?
- Investors favor single-name risk over diversified pool exposure
- The law of large numbers makes the aggregate pool losses highly predictable
- FDIC deposit insurance guarantees the senior ABS tranches
- Subprime borrowers are charged lower rates once loans enter the ABS trust
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