What is Asset Backed Security?

An Asset-Backed Security is a kind of security that is backed up by a bundle of other assets like leases, loans, and many others. Mostly, ABS are backed up by credit cards and auto loans. ABS issues are very much similar to that mortgage-backed securities.

Basically, an ABS or Asset-Backed Security is one whose income payments and values are obtained from and backed up by a specified bundle of assets. The pool or bundle of assets is basically a group of illiquid and small assets which are not able individually to be sold. Pooling of assets into financial instruments lets them get sold to common or general investors. This process is commonly called secularization and this allows the investing risk to get diversified. This is because every security will symbolize a certain amount of total value of a diverse pool of assets.  The pool of underlying assets consists of all the common payments from auto loans, credit cards, and mortgage loans to obscure cash flows like royalty payments, movie revenues, and aircraft leases.