Asset-Backed Securities (ABS / MBS)
Bonds backed by pools of loans - mortgages, auto loans, credit cards.
What is Asset-Backed Securities (ABS / MBS)?
Loans are pooled and the cash flows passed through to investors, often in tranches with different risk levels. Mortgage-backed securities carry prepayment risk: when rates fall, homeowners refinance and principal returns early, at the worst time to reinvest. When rates rise, prepayments slow and the security's life lengthens (extension risk).
Asset-Backed Securities (ABS / MBS): a worked example
A GNMA pass-through pays monthly interest and principal from a pool of government-insured mortgages.
More terms in Bonds & Cash Equivalents
Certificate of Deposit (CD)
A bank time deposit paying a fixed rate for a fixed term, FDIC insured.
Commercial Paper
Unsecured short-term corporate debt, 270 days or less.
Treasury Inflation-Protected Securities (TIPS)
Treasuries whose principal adjusts with the CPI.
Zero-Coupon Bond
Sold at a deep discount, pays no interest, matures at par.
General Obligation (GO) Bond
A municipal bond backed by the issuer's full faith, credit, and taxing power.
Revenue Bond
A municipal bond repaid only from the revenue of a specific project.
Insured Municipal Bond
A muni with third-party insurance guaranteeing principal and interest.
Municipal Bond Tax Treatment
Interest usually federally tax-free; gains are not.