Asset-Backed Securities [ABS]

Asset-Backed Securities (ABS) are bonds or notes backed by financial assets such as auto loans, credit card receivables, home equity loans, student loans, or equipment leases. These assets are pooled together and packaged into securities that can be sold to investors. The cash flows from the underlying assets are used to pay interest and principal to ABS investors. For example, a bank might bundle 1,000 auto loans worth $20 million total into an ABS, then sell securities backed by those loan payments to investors. This process, called securitization, allows the original lender to remove loans from their balance sheet and free up capital for new lending. ABS typically offer higher yields than government bonds but carry more risk. They are structured in tranches with different risk levels and returns. The 2008 financial crisis highlighted risks in ABS markets, particularly subprime mortgage-backed securities.