ACCA Financial Management (F9) Certification Practice Exam

What is the primary purpose of securitisation?

1. To increase liquidity of stocks

2. To convert illiquid assets into marketable securities

3. To lower interest rates on loans

4. To diversify investment portfolios

The correct answer is: To convert illiquid assets into marketable securities

The primary purpose of securitisation is to convert illiquid assets into marketable securities. This process involves pooling together various types of illiquid assets, such as mortgages or other receivables, and then issuing securities backed by these assets. Investors can purchase these securities, which allows for the transformation of assets that are not easily tradable into instruments that can be bought and sold in the financial markets. This conversion facilitates greater market access for the underlying assets, enhances liquidity for the originating financial institutions, and allows investors to gain exposure to cash flows generated by the pooled assets. As a result, securitisation plays a critical role in financial markets by enabling institutions to manage their risk and funding needs more effectively, while providing investment opportunities for investors seeking returns from asset-backed securities. While the other options touch on aspects related to finance, they do not capture the essence of what securitisation fundamentally aims to achieve. For example, increasing liquidity of stocks is not directly linked to securitisation, which is more focused on turning specific asset types into tradeable securities. Lowering interest rates on loans or diversifying investment portfolios are benefits that might arise from a well-functioning securitisation market but do not reflect the primary goal of the process itself.