Canadian Securities Course (CSC) Level 2 Practice Exam

What is the primary function of Asset-Backed Securities (ABS)?

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

2. Provides a guarantee of principal regardless of performance.

3. Include assets reacting to interest rates and offer stable potential gains.

4. Structures that divide attributes of shares with specific risk and return profiles.

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

The primary function of Asset-Backed Securities (ABS) is to represent a claim to a pool of assets, which typically includes loans, leases, credit card debt, or receivables. These securities are structured in such a way that they provide investors with claims to cash flows generated from those underlying assets. The performance of ABS is linked to the performance of these assets, meaning that the risk and return vary based on the quality and risk level of the asset pool. This allows investors to gain exposure to various asset types while diversifying risk. The other options address aspects that don’t accurately describe ABS. The statement about guaranteeing principal regardless of performance relates more to certain types of bonds or investment vehicles that provide capital protection, rather than the inherent risk associated with ABS. Mentioning assets reacting to interest rates and offering stable gains could point to different securities, like fixed income instruments, but not specifically to the diverse nature of ABS pools. Lastly, dividing attributes of shares with different risk-return profiles refers to equity securities rather than the structured finance context of ABS.