Question

which of the following best describes the benefits to the borrower of selling asset-backed securities? group of answer choices due to the portfolio effect, the borrower can package up low-quality accounts receivable and sell them for a premium price. the borrower trades future cash flows for current cash flows. the asset-backed security is likely to carry a high credit rating of aa or better. the borrower trades future cash flows for current cash flows and the asset-backed security is likely to carry a high credit rating of aa or better.

Answer 1

Selling asset-backed securities provides benefits to the borrower such as trading future cash flows for current cash flows, having a high credit rating, and offloading risk to investors.

Step-by-step explanation:

The benefits to the borrower of selling asset-backed securities include the ability to trade future cash flows for current cash flows and the likelihood of the asset-backed security carrying a high credit rating of AA or better. By packaging up low-quality accounts receivable and selling them for a premium price, the borrower can also benefit from the portfolio effect. This allows them to offload the risk associated with these accounts receivable to investors.

Answer 2

The main benefits to a borrower of selling asset-backed securities are the immediate liquidity by trading future cash flows for current ones and the potential for a high credit rating on the securities.

Step-by-step explanation:

The process of securitization offers notable benefits to the borrower. The primary advantage is that the borrower is able to trade future cash flows for current cash flows, enabling immediate liquidity. This liquidity is often critical for conducting business operations or pursuing investments. Moreover, when these asset-backed securities are backed by a diverse pool of assets, they tend to be rated more highly by credit rating agencies, increasing investor confidence and potentially lowering the cost of borrowing. High credit ratings, often AA or better, make these securities more attractive to investors, as they are perceived as safe investments.

It's important to note, however, that these positives come with the caveat that the originating bank may be incentivized to be less diligent in loan underwriting if it intends to offload the loans quickly through securitization. This led to the prevalence of 'subprime' loans and contributed to financial crises. Nonetheless, from the borrower's perspective, securitization can mitigate certain financial risks and support liquidity needs.