Series 79: Asset-Backed Securities

Asset-Backed Securities

Asset-backed securities are neither corporate nor government bonds. Rather, they are bonds or notes originated by a bank or other lender and backed by a pool of underlying assets that have been “securitized”—aggregated and turned into tradable financial instruments. This process allows lenders to create securities out of assets that would be impractical or impossible to sell standing alone.

Virtually any expected income stream can be securitized, but the majority of asset-backed securities are backed by pools of mortgages. As noted, agency securities typically take the form of mortgage-backed securities. Other common types of asset-backed securities include securities backed by receivables from credit cards (so-called “plastic bonds”), student loans, or car loans.

Investors in asset-backed bonds receive payments (through an intermediary) on a pass-through basis as the borrowers on the underlying loans or other assets make their principal and interest payments. For this reason, asset-backed securities are often referred to as pass-through securities. Because bond payments are dependent on payments first being made b