creating an asset-backed security We know that there are many different pools of loans out there. Let's take a look at how to create an asset-backed security.

most of these products focus on one type of loan such as auto loans aircraft leases or corporate loans critization begins with the creation of a special purpose vehicle or SPV created by a sponsor the SPV acquires a pool of assets and simultaneously raises debt financing to fund the purchase of those assets through the issuance of asset-backed securities.

The SPV looks in acts like a new company with assets on the left hand side, which are the pooled loans, which is purchased.

The loans are now assets because they still have contractual obligation to make payments to the owners of the debt.

Which is now the SPV.

As we know from accounting the left must always equal the right hand side. We also know that the right hand side represents the funding of the assets on the left to purchase those loans the SPV must have capital and so it raises Capital equal to the amount of loans. It wishes to purchase like all companies there is debt and there is also equity which acts as the cushion to the fixed charge obligations of the debt. When we look at the debt component the funding this is where the securitization comes into play. The debt will be broken into tranches representing actual Securities bearing different levels of risk and offering different levels of return. Let's continue to refine this and see how these differing risk profiles are created in how the cash flows work.