Asset Backed Securities

Asset-backed securities (ABSs) are bonds that are backed by a particular pool of assets. It is a financial security collateralized by a pool of assets. These assets can take several forms, such as mortgage loans, credit card receivables and car loans. For investors, asset-backed securities are an alternative to investing in corporate debt. An ABS is similar to a mortgage-backed security, except that the underlying securities are not mortgage-based.

The assets provide the bondholders’ security, since the cash generated from them is used to service the bonds (pay the interest), and to repay the principal sum at maturity. Such arrangements are often referred to as the securitization of assets. The name ‘securitization’ reflects the fact that the resulting financial instruments used to obtain funds from the investors are considered, from a legal and trading point of view, as securities. This enables the owner of the assets to make them marketable

An ABS allow issuers to generate more cash, which in turn, is used for more lending while giving investors the opportunity to invest in a wide variety of income-generating assets. Usually, the underlying assets of an ABS are illiquid and can't be sold on their own.