How ABS, CDOs, and Covered Bonds Differ

Summary

The document distinguishes securities by the assets behind them and by how investors receive repayment. Asset-backed securities represent claims on pools of non-mortgage loans, such as auto or credit-card debt, while mortgage-backed securities represent pooled mortgages. A collateralized debt obligation buys securities or other assets and issues tranches with different payment priorities; senior tranches receive cash flows ahead of junior tranches and are described as less risky and less leveraged.

Covered bonds are presented as bank debt supported by a pool of mortgages that acts as additional collateral if the issuing bank cannot repay. Unlike the independent securities described for ABS and CDO structures, covered bonds remain part of the issuing bank’s capital structure, and the issuer must replace assets that mature or default. This is a concise structural comparison, not a treatment of legal variations, credit modelling, or market risk. The explanation uses simplified definitions, so details can differ across jurisdictions and deal structures.

Key ideas

• ABS represent claims backed by pooled non-mortgage assets, while mortgage-backed securities use mortgage pools.
• A CDO purchases assets and issues tranches with different priorities for receiving cash flows.
• Senior CDO tranches have payment priority over junior tranches and are described as less risky.
• Covered bonds are bank debt supported by a mortgage pool and remain liabilities of the issuing bank.
• Covered bond issuers are described as replenishing collateral when assets mature or default.

Tags

# ABS vs covered bonds vs CDO


# ABS vs covered bonds vs CDO












What is the difference between asset-backed securities(ABS), covered bonds and collateralized debt obligations (CDO)?

## Answer by Alex C (score 2, accepted)

https://quant.stackexchange.com/a/23086

MBS are securities which represent ownership in a pool of mortgages

ABS are securities which represent ownership in a pool of assets other than mortgages (for example auto loans or credit card loans)

Collateralized Debt Obligation are complex entities which issue tranches of securities to investors and use the proceeds to buy MBS, ABS or other assets. The highest tranches have priority in receiving cash flows from the owned securities, and thus are less risky and less leveraged than the lower tranches.

Covered bonds is the English name for Pfandbriefe, a German invention. They are debt instruments issued by a bank, and are part of the capital structure of that bank (unlike the above which are independent securities). The pfandbriefe are backed by a pool of mortgages, which serve as a kind of second level guarantee (or "cover") if the bank is unable to repay. In addition the bank is required to put up new mortgages if the old ones expire or default.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.