Canadian Securities Course (CSC) Level 2 Practice Exam

What are Asset-Backed Securities (ABS) primarily designed to do?

1. Guarantee the principal investment regardless of performance.

2. Be a type of equity ownership vehicle established as a trust issuing ownership shares.

3. Passive investments with specific risk and return profiles, often assembled by banks.

4. Represent a claim to a portion of a pool of assets with different levels of risk and return.

The correct answer is: Represent a claim to a portion of a pool of assets with different levels of risk and return.

Asset-Backed Securities (ABS) are primarily designed to represent a claim to a portion of a pool of assets, which often includes different types of receivables, such as loans or credit card debt. This pooling of assets allows for the creation of a structured investment where investors can gain exposure to the underlying cash flows generated by those assets. The correct choice accurately highlights that ABS can include various assets with different levels of risk and return. This diversification is crucial as it allows investors to choose ABS that align with their specific risk tolerance and return expectations. Typically, these securities are backed by a variety of asset types, which adds units of risk and return characteristics to the ABS, making them attractive to a range of investors. While the other options present alternatives, they do not adequately capture the nature and intent of ABS. The first choice suggests a guarantee of the principal investment, which is generally not a feature of ABS, as their value is tied to the performance of the underlying assets. The second choice describes a vehicle for equity ownership rather than a debt security like ABS. The third choice mentions passive investments, but it lacks the focus on the structuring of those investments around a varied pool of underlying assets that defines ABS. Thus, the correct understanding of ABS