Asset-Backed Security

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

  1. Underlying Assets: The pool of financial assets supporting the security. 
  2. Tranches: Different classes of securities with varying levels of risk and return. 
  3. 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.


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