What Is Asset-Backed Security (ABS)?
An Asset-Backed Security (ABS) is a financial instrument backed by a pool of assets, such as loans, leases, credit card debt, royalties, or receivables.
Key Takeaways
- Definition: A security backed by a pool of financial assets.
- Purpose: To provide investors with regular payments and diversify risk.
- Examples: Mortgage-backed securities, auto loans, credit card receivables.
Components of ABS
- Underlying Assets: The pool of financial assets supporting the security.
- Tranches: Different classes of securities with varying levels of risk and return.
- Payments: Regular payments to investors derived from the cash flows of the underlying assets.
Importance of ABS
ABS provides liquidity to financial markets, enable risk diversification for investors, and offer a way for originators to raise capital.
