What defines "asset-backed securities"?

Asset-backed securities (ABS) are financial instruments that derive their value from a pool of underlying financial assets, such as loans, leases, or receivables. These securities are created through the process of pooling various types of assets together, which allows for the issuance of securities that investors can purchase. The cash flows generated by the underlying assets are then used to pay interest and principal to investors in the ABS.

The characteristics of ABS include their ability to provide diversification and risk sharing because they are often backed by a wide range of assets rather than just one. This pooling of different types of receivables, such as auto loans, credit card debt, or mortgages, offers a way for institutional investors to invest in a variety of asset types while receiving structured payments over time.

In contrast, the other options do not reflect the definition of asset-backed securities. For instance, stocks that represent ownership in a company are equity instruments and do not provide the same features as ABS. Government bonds involve debt obligations of the government and typically do not have underlying assets to back them. Equities that offer dividends are also ownership sharing in companies and do not relate to the pooling of financial assets and the cash flows from those assets, which are central to the structure of asset-backed securities