Asset-Backed Security

An Asset-Backed Security (ABS) is a type of financial security that is very similar in structure to a mortgage backed security (see definition below), but is backed by a pool of consumer loans and generally does not include mortgage loans. Most ABSs are backed by credit card receivables, auto loans, student loans, or other loan and lease obligations.

An asset-backed security is a security whose value and income payments are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can include common payments from credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie revenues.