Fixed-Income Securities and Derivatives Handbook, Second Edition

CHAPTER 15

Securitization and Asset-Backed Securities

Perhaps the best illustration of the flexibility, innovation, and user-friendliness of the debt capital markets is the rise in use and importance of securitization. As defined in Sundaresan (1997), securitization is “a framework in which some illiquid assets of a corporation or a financial institution are transformed into a package of securities backed by these assets, through careful packaging, credit enhancements, liquidity enhancements and structuring.”

The flexibility of securitization is a key advantage for both issuers and investors. Financial engineering techniques employed by investment banks today enable bonds to be created from any type of cash flow. The most typical such flows ...