Asset-backed Securities (ABS) Definition & Examples

Published Dec 23, 2022

Definition of Asset-Backed Securities (ABS)

Asset-backed securities (ABS) are financial instruments that are backed by a pool of assets. That means they are created when a company or financial institution bundles together a group of assets, such as loans, mortgages, or credit card receivables, and then sells them to investors. The investors then receive a stream of payments from the underlying assets, which can be used to generate a return.

Example

To illustrate this, let’s look at an example of a mortgage-backed security (MBS). A bank may bundle together a group of mortgages and then sell them to investors. The investors then receive a stream of payments from the underlying mortgages, which can be used to generate a return. The bank, in turn, can use the money it receives from the sale of the MBS to make more loans.

Why Asset-Backed Securities Matter

Asset-backed securities are an important part of the financial system. They provide a way for companies and financial institutions to raise capital without having to issue new debt or equity. In addition, they provide investors with a way to diversify their portfolios and generate a return from various assets. Finally, they can also help to reduce risk by spreading it across a larger pool of assets.

Important Disclaimer: This definition was written by Quickbot, our artificial intelligence model trained to answer basic questions about economics. While the bot provides adequate and factually correct explanations in most cases, additional fact-checking is required. Use at your own risk.