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Asset-Backed Security

Definition of 'Asset-Backed Security'

Asset-backed securities, or ABS, are bonds created from various types of consumer debt.

When consumers borrow money -- whether by taking out a home-equity or auto loan, or by running a balance on a credit card -- their loans become assets on the books of the entity that extended the credit -- a bank, an auto finance company or a consumer finance company.

The assets may be sold to a trust -- a corporation that exists only on paper, and whose sole purpose is to issue bonds backed by the assets it contains -- asset-backed securities. If, for example, your car loan has been "securitized," your payments on the loan flow through the trust to the investors in the asset-backed securities issued by the trust.

The main types of asset-backed securities are home-equity loans, credit-card receivables, auto loans, mobile home loans and student loans. Asset-backed securities are purchased primarily by institutional investors, including corporate bond mutual funds. They are a variety of spread product and are evaluated as such.

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