Terms

Asset-Backed Security

Abbreviation
ABS

An asset-backed security is an investment security that is collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, or receivables. It allows issuers to generate cash, which can be used for more lending while giving investors in the ABS the opportunity to participate in a wide variety of income-generating assets. For investors, asset-backed securities can be an alternative to corporate debt.

  • The underlying assets of an ABS are often illiquid and can't be sold on their own. So, pooling assets together and creating an ABS financial security—a process called securitization—allows the owner of the assets to make illiquid assets marketable to investors.
  • The type of loans that are typically securitized includes home mortgages, credit card receivables, auto loans, home equity loans, student loans, and loans for boats.
  • It is similar to mortgage-backed security, except that the underlying securities are not mortgage-based.