Asset-backed

Asset-backed describes a financial instrument, often a security or loan, whose value and payments are derived from a pool of underlying assets. These assets can be a variety of income-generating items such as loans, leases, receivables, or other forms of obligations. The asset pool provides the collateral or security for the financial product, mitigating risk for investors. The performance of the asset-backed instrument is directly tied to the cash flow generated by the underlying assets and the credit quality of the associated borrowers or obligors. Properly structured, asset-backed securities can offer diversification and potentially attractive yields.

Asset-backed meaning with examples

• The mortgage-backed securities market, a large segment of the asset-backed sector, allows investors to gain exposure to the housing market without directly owning property. These securities represent claims on the cash flows generated by mortgage payments from homeowners across the country. (59 words)
• A company might issue asset-backed commercial paper, utilizing its accounts receivable as the underlying assets. This provides a short-term funding source, allowing the company to manage its working capital efficiently. The receivables collateralize the paper. (59 words)
• Car loan-backed securities are a popular type of asset-backed security, offering investors returns based on car loan payments. The issuer pools together numerous auto loans and sells shares to investors that represent a claim on the incoming payments. (59 words)
• The increasing use of securitization means that even royalties from music streams are being used in asset-backed financing. These securities generate income that may have been unheard of several years ago, and can create innovative funding options. (59 words)
• Student loan-backed securities are another significant element of the asset-backed securities market. Government or private student loan payments generate cash flow and they provide the foundation for these investment products with interest and principal payments. (59 words)